Starting a digital storefront on Etsy.com can be a rewarding way to sell your handmade and vintage items. Of course, you may feel overwhelmed at tax time if you're new to Internet selling — sites like Etsy don't take any taxes out of your sales, so you'll need to make sure Uncle Sam gets his cut every year. If you earned more money than you spent on your Etsy business, then you must claim your income on a Schedule C form. Additionally, if you made at least $400 from your Etsy business, you're considered self-employed and you must fill out a Schedule SE form as well.
Keep records of your income, including all sales through Etsy and other venues. Keep detailed records of your possible deductions, such as office supplies, craft supplies. Write down where and when you use certain items or spaces for your business -- for example, computers, a home office, cell phones or an art studio.
Download a Schedule C form from the IRS website, the form on which you will report your profit and losses. Fill out your income and deduction information. Note that you must have written proof of your legitimate deductions, or the Internal Revenue Service may audit you.
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Download a Schedule SE form from the IRS website. You will need to complete Schedule C before completing Schedule SE.
File a Form 1040, which is an individual tax return form. You will need to send Form 1040, Schedule C and possibly, Schedule SE to the IRS. You may also be required to file similar forms with your state and/or local income tax returns.