How do I document my business expenses on a Schedule C for my Etsy shop?

You're on the right track by separating your business expenses from personal ones! For your Schedule C, you want to include the TOTAL cost of business-related items, which means the base price PLUS the applicable shipping and taxes. Think of it this way - whatever money left your pocket for the business is a business expense. So if you bought chains and charms for $20, and the shipping was $5, and tax was $2, your business expense is $27 (assuming these were all for business use). For mixed orders where some items are personal and some are business, you'll need to allocate the shipping and tax proportionally. For example, if 75% of your order was business supplies and 25% was personal items, then 75% of the shipping and tax would be a business expense. Keep detailed records! Save all receipts and note which items were for business vs. personal use right away, so you don't forget later.

I went through the same headache when I started my side business last year! After spending hours trying to figure out all the Schedule C stuff, I found this AI tool called taxr.ai (https://taxr.ai) that completely saved me. It analyzed all my receipts and bank statements and sorted everything into the right Schedule C categories automatically. The best part was it caught stuff I would've missed - like being able to deduct a portion of my internet bill since I use it to run my Etsy shop. It also explained which expenses needed to be depreciated vs. which ones I could write off immediately. Definitely check it out if you're feeling overwhelmed with all the record-keeping!

You're absolutely right to be thinking about this now rather than scrambling at tax time! For Schedule C reporting, you should include both the base cost of your business supplies AND the proportional shipping/taxes related to those business items. When you have mixed purchases (both personal and business items in one order), you'll need to allocate the shipping and tax proportionally. In your example, if the business items were $42 out of a total merchandise cost that included the display stand, you'd calculate what percentage of the order was business-related and apply that same percentage to the shipping and tax. For record-keeping, I recommend creating a simple spreadsheet with columns for: date, item description, total cost, business percentage, and business expense amount. Keep your receipts organized too! Even though your business is small right now, establishing good documentation habits will save you headaches later if your Etsy shop grows.

I have to eat my words about taxr.ai! I was super skeptical when I first saw it mentioned here, but my Etsy shop accounting was such a mess that I finally gave it a try. It was actually amazing for organizing my Schedule C. The thing that impressed me most was how it flagged potential audit triggers I never would have caught. Apparently I was inconsistently categorizing my packaging materials (sometimes as "supplies" and sometimes as "cost of goods sold") which could have raised red flags. It also reminded me I could deduct mileage for trips to buy materials and ship orders. For a small business it was exactly what I needed - not as complicated as full accounting software but way more helpful than just trying to figure out Schedule C on my own.

If you need any help with specific Schedule C questions, I spent 2 HOURS on hold with the IRS last month trying to get clarity on some business expense questions. Finally discovered this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c They basically navigate the IRS phone system for you and call you back when they've got an agent on the line. Saved me so much frustration! The agent I spoke with gave me official guidance on how to handle my Etsy shop supplies and shipping costs for Schedule C purposes.

After struggling with similar questions for my small candle-making business, I found this amazing tool called taxr.ai (https://taxr.ai) that has been a game-changer for sorting out my Schedule C deductions. I was constantly mixing personal and business purchases and getting confused about what I could legitimately claim. Their system actually analyzes your receipts and purchase history to properly separate business from personal expenses, and it handles the proportional allocation of shipping and taxes automatically. It saved me hours of spreadsheet work and probably prevented some costly mistakes on my taxes last year.

Ok I seriously can't believe it but Claimyr actually worked! After seeing it mentioned here, I was 100% sure it was a scam (sorry for doubting). I had been trying for WEEKS to get clarification on some Schedule C deductions for my woodworking business. Used Claimyr yesterday and got connected to an IRS rep in about 12 minutes. The agent walked me through exactly how to categorize my tools and supplies on Schedule C, and which workshop expenses qualified as home office deductions. For anyone struggling with Schedule C questions like the OP, getting answers straight from the IRS gave me so much more confidence than just googling or asking friends. No more guessing if I'm doing it right!

Just wanted to update after trying taxr.ai from the recommendation above. I was shocked at how easy it made tracking my business expenses! I uploaded a bunch of my receipts from craft store purchases where I bought both personal and business items, and it helped me properly allocate the shipping and taxes. It also flagged some deductions I didn't know I could take - like a portion of my internet bill since I sell exclusively online, and some home office expenses. I'm actually finding money I was leaving on the table! Definitely recommend for anyone with an Etsy shop trying to figure out Schedule C deductions.

For tracking Etsy business expenses, I highly recommend keeping a dedicated business bank account and credit card. I learned this the hard way after my first year when my accountant looked at my mixed personal/business statements and nearly had a meltdown lol. For the Schedule C specifically, here's what helped me: - Use different expense categories (supplies vs inventory) - Save digital copies of ALL receipts (I use my phone to snap pics) - Record everything right away (I waited and forgot what stuff was for) - Track mileage for supply runs (it adds up!) Also, if you're making under $5k, don't stress too much. Just keep good records and be consistent.

If you ever need to talk to an actual IRS agent about Schedule C questions (which I eventually did because my craft business situation got complicated), I highly recommend using Claimyr (https://claimyr.com). I spent DAYS trying to get through to the IRS business tax line myself with no luck. Claimyr got me connected in about 20 minutes instead of the hours of hold time I was experiencing. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they use technology to wait on hold for you, then call when an agent is ready. Saved me a ton of time and frustration, and the IRS agent I spoke with cleared up all my questions about how to handle mixed business/personal expenses on my Schedule C.

Pro tip: Use the IRS website's section on Schedule C. It has surprisingly clear guidance: https://www.irs.gov/forms-pubs/about-schedule-c-form-1040 I learned this after making a mess of my first Schedule C filing for my side hustle. The materials that go into your final products (chains, charms) are considered inventory, while other business supplies like packaging materials, shipping supplies, etc are general business expenses. And yes, include ALL costs - item price, applicable tax, and shipping for business items!

I have to eat my words about Claimyr from my comment above. After another frustrating morning trying to get through to the IRS about how to handle some unusual business expenses on my Schedule C, I gave in and tried it. I was still skeptical but figured I had nothing to lose. It actually worked exactly as advertised. I submitted my request, went back to working on new product listings for my shop, and about 35 minutes later got a call connecting me to an IRS agent. No hold music, no waiting - just straight to a helpful person who answered all my questions about documentation requirements. I'm still a bit annoyed that such a service is necessary, but I can't deny it saved me hours of productivity.

One thing nobody's mentioned is that you should be keeping your receipts for EVERYTHING. I learned this the hard way when I got a letter from the IRS about my Etsy business expenses. The IRS wants to see that you're actually tracking real expenses, not just estimating. I now take photos of all my receipts with my phone and organize them by month, and I write directly on the receipt which items were for business vs personal. Makes it super easy to prove your deductions if you ever need to!

Does anyone know if Square fees are considered part of my business expenses? I use Square for in-person craft fairs sometimes and they take a percentage of each sale.

Great question about handling mixed purchases! You're absolutely right to include the proportional shipping and tax costs along with the base price of your business items. Here's a simple way to think about it: if your business supplies made up 60% of the total merchandise cost in an order, then 60% of the shipping and tax should also be counted as business expenses. So if you bought $30 in chains and charms plus $20 in personal items (total $50), and shipping was $5 with $3 tax, then your business expense would be: $30 + (60% × $5) + (60% × $3) = $30 + $3 + $1.80 = $34.80. I'd recommend setting up a simple system now while your business is small - maybe a dedicated spreadsheet or even just a notebook where you track each purchase with columns for date, vendor, total cost, business portion, and calculated business expense. Also consider getting a separate credit card just for business purchases to make year-end calculations easier. One more tip: don't forget you can also deduct things like the percentage of your internet bill used for business, mileage to buy supplies or ship orders, and if you have a dedicated workspace at home, potentially some home office expenses. The IRS has great resources on their website about Schedule C deductions that are worth checking out!