Tax season, and your Etsy 1099-K arrives showing $28,400. You know for a fact your bank never saw anywhere near that — your deposits added up to maybe $23,000. First reaction: panic. Did Etsy make a mistake? Are you about to be taxed on money you never received?
No, and no. The 1099-K being higher than your payouts is expected — that's how the form is designed to work. Here's what it actually counts in 2026, why the gap exists, and how to make sure you only pay tax on your real profit.
What the 1099-K actually reports: gross, not net
Form 1099-K reports your gross sales — the total amount buyers paid, before anything is taken out. Etsy's own "How Is the Total on My 1099-K Calculated" help page is explicit: Box 1a includes the item price, the shipping the buyer paid, and gift-wrap charges, added up across every order. It does not subtract:
- Etsy's fees — listing ($0.20), transaction (6.5%), payment processing (~3% + $0.25 in the US), Offsite Ads, regulatory fees;
- Refunds you issued to buyers;
- Shipping labels you bought through Etsy;
- Your own costs — materials, packaging, the shipping you actually paid.
So the 1099-K is the biggest, most flattering version of your revenue: everything the buyer handed over, none of what left again. Your bank deposits are that same money after all the fees and refunds — which is why they're smaller. The difference between the two numbers isn't missing money; it's the fees and refunds you already paid. This is the same gross-vs-net gap we cover in gross profit vs net profit.
One thing that's usually NOT in the gap: sales tax
A common wrong guess is "the extra must be sales tax." Usually it isn't. When Etsy collects and remits sales tax as a marketplace facilitator (which it does in most US states), that tax is excluded from your 1099-K — Etsy handled it, so it's not your income and not on the form. So don't go looking for sales tax to explain the gap; the gap is almost entirely fees + refunds + shipping labels. (More on who handles the tax in does Etsy collect sales tax for sellers.)
The 2026 threshold changed — and it went UP
For a couple of years the 1099-K threshold was scheduled to drop toward $600, and a lot of older articles still say $2,000 for 2026. That's out of date. The One Big Beautiful Bill Act, signed in July 2025, permanently restored the original threshold: you'll only get a federal 1099-K if you had more than $20,000 in gross sales AND more than 200 transactions in the calendar year. Both conditions have to be met.
Two important caveats:
- Some states set their own, much lower thresholds. Massachusetts, Vermont, Virginia and Maryland, for example, trigger a 1099-K at just $600. If your bank/shop address is in one of those, you can get a form well below the federal line.
- No 1099-K does not mean no tax. All your Etsy income is taxable whether or not a form is issued. The 1099-K is just a copy the IRS also receives — not the thing that creates the tax. See does Etsy report to the IRS.
How to reconcile it so you're taxed on profit
You report the gross 1099-K figure as income, then deduct every business expense to get down to your real, taxable profit. The fees that inflate the 1099-K are exactly the deductions that bring it back down:
- Start with the gross number from the 1099-K as your reported revenue.
- Subtract Etsy fees — all of them. They're deductible business expenses. (See how to account for Etsy fees in your bookkeeping.)
- Subtract refunds you issued.
- Subtract shipping labels, materials, packaging and your other real costs. (Full list in Etsy tax deductions.)
- Cross-check against your deposits. Gross − fees − refunds should land close to what actually hit your bank; if it doesn't, something's miscategorized. Our reconciliation guide walks through this.
A worked shape: a $28,400 1099-K with ~$3,400 of Etsy fees and ~$1,000 of refunds explains a ~$24,000 net into your bank. You're taxed on the profit left after your own costs come out of that — not the $28,400. This is also why setting money aside on gross is a mistake; base it on profit (see how much to set aside and quarterly estimated taxes).
A quick note on what we can and can't tell you
We're not tax advisors, and how you file depends on your country and situation — for the return itself, an accountant is worth it. What we're good at is the number underneath all of this: your true net per order. You can estimate one sale's fees with our free Etsy fee calculator, but reconciling a whole year's 1099-K means matching the actual fees Etsy charged, order by order, to the cent. That's what Seller Profit Lens does: it connects to your shop read-only, reads every real fee and refund from your Etsy ledger, and shows profit after your own costs — so the gap between your 1099-K and your bank stops being a mystery. It's free in beta right now. Join the waitlist →