How to start an online business using Etsy

If online shopping was doing well before the coronavirus pandemic, it’s certainly thriving now. Online-only businesses like BooHoo have reported massive spikes in profits, with people buying more online even as physical shops reopen.

Meanwhile, many people who have been furloughed or lost their jobs are looking for new career opportunities that are viable in a post-corona age. Enter Etsy.

The online craft marketplace has been a major player for some years now, but the pandemic has seen its popularity swell. Numerous home businesses have used Etsy to create everything from protective masks, to homewares, to apparel for those venturing outside. With many people still reluctant to go out shopping, starting an online business using Etsy could be a safe and fulfilling business opportunity.

What is Etsy?

Etsy is an online marketplace for handmade or vintage goods. While it is often thought of as a destination for arts and crafts, all kinds of items are bought and sold on Etsy, including clothing, jewellery, toys and even party supplies. It is ideal for individuals or small businesses looking to find an audience for unique artisanal goods, and build a brand from a standing start.

Etsy has an advantage over other eCommerce platforms in that it allows you to set up your own online storefront, which is both easier to find and more feature-rich than alternatives such as eBay and Amazon. You can for instance create colour or size variations for products, add fields for personalisation, and aggregate reviews for all of your store’s products.

How much does it cost to sell on Etsy?

Like most other online marketplaces, setting up your own Etsy store is free. However, each listing on Etsy comes with a nominal fee. On top of this, you'll also pay a small commission for each completed sale, known as a transaction fee. Finally, you will have to pay a payment processing fee based on the payment provider used to resolve your transactions.

Each listing costs $0.20, or roughly 15p depending on exchange rates. The same fee is charged for listings set to auto renew (or relist) after they have been purchased. You will also have to pay $0.20 for each variation of an item that somebody buys (e.g. a different colour), known as a multi-listing fee. This is only charged when the item is bought, not when it is listed.

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As of 11th April 2022, the transaction fee charged for each sale has risen to 6.5%. In terms of payment processing fees, UK bank account holders will be charged 4% + 20p per transaction. You can find the full list of payment processing fees for bank account holders in other countries here.

In total, the UK fees for selling on Etsy equate to 10.5% of the transaction + 35p. This is potentially less than eBay's fee of 12.8% + any listing fees, international fees, and currency conversion costs. Sellers of more expensive items on Etsy will particularly benefit, while less expensive items are likely to have smaller margins.

Do you have to pay tax to sell on Etsy?

The amount of tax you pay as an Etsy seller will depend on how much you sell, and whether your Etsy shop is a business or a hobby. There are three main categories of Etsy seller for tax purposes:

● Employed and selling as a hobby
● Unemployed or self-employed and selling as a hobby
● Self-employed and selling as main source of income

If you're employed and selling as a hobby, you can earn up to £1000 in total sales without being taxed under the Trading Allowance. Anything above this will be considered as an addition to the salary you earn from your job.

Say for instance that you earn £30,000 from your job, and make £3000 selling on Etsy on the side. In this case, the first £1000 in sales is tax free, but you will pay income tax as if you had a salary of £32,000. The exact amount you pay will depend on what you earn, and where this puts you in the income tax bracket.

If you are unemployed or self-employed, your income from Etsy will form part of your Personal Allowance. You will not be taxed on any income up to £12,500, with anything above this falling into several tax bands from 20% to 45%. This is the same as the income tax you pay as a salaried employee, with the difference that you may not be earning enough to pay any tax.

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If you are self-employed and Etsy is your main form of income, you will need to pay both income tax and Class 2 and 4 National Insurance contributions. These apply when you begin to earn over £6,515 and £9,568 respectively. However, you may also claim back VAT, as well as deducting expenses from your turnover to reduce your income tax bill.

Etsy costs you can claim as allowable expenses may include seller fees, payment processing fees, accounting costs and marketing. Note that you can register for VAT and submit your VAT number to Etsy so that they will charge 0% VAT on each transaction. However, this requires a more complicated accounting process than simply claiming the VAT back.

Setting up an Etsy shop in the UK

Setting up an Etsy shop is a straightforward process. Once you’ve created an account using the menu in the top right of the screen, you should see a ‘Sell on Etsy’ link near your profile and basket. This will lead you through a step-by-step process where you will pick your country, shop language and currency preferences, as well as what your shop will be called.

Next, you’ll be asked to add some stock to your new shop. There are numerous options here:

Add photos

Photos are key to getting people to click on your listings, as well as convincing them to purchase. Images should be at least 2000 pixels wide - if you’re in doubt, then the standard pictures produced by most camera phones and DSLRs will reach this requirement. The important thing is that they are large enough to be zoomed in on, so people can see the product in detail.

While you shouldn’t go too crazy with photos, it’s helpful to be able to see small details on items, as well as to view them from as many angles as possible. You should also pay attention to the first photo you add, as this will become the ‘thumbnail’ image that people see when they find your listing.

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You can crop and reposition this photo after you’ve uploaded it to ensure that it’s as enticing as possible. However, many Etsy veterans actually include multiple pictures within one thumbnail, such as showing different colour variations for that product, which you would have to do before uploading.

Describe your product

One of the most important attributes of any Etsy listing is its title. This is the primary means by which people will discover your products, so it’s not uncommon for them to turn into a bit of a word soup, and include multiple relevant keywords for that product type.

Your approach will differ depending on what you are selling. If the product is very specific and has few competitors, it may not need too many additional keywords. If you have a lot of competition or the item is more generic, you may need to add more detail.

The other aspects which help people to find your products are the categories and attributes. The category will decide which menu your item appears under, and is a broad way of filtering items. The attributes are things like colour and occasion, and help people to narrow down their search results, as well as being a unique selling point for your product.

Finally, you have tags. Tags are additional keywords that do not need to be in your title, but help to reinforce what your product is and what features it has. These are designed to help people find your item by things like material, size and other attributes. While their value to searches is disputed, you should make sure to use all 13, covering everything you think people would be searching for.

Customisation options

When adding an attribute to your product, you may also want to provide different customisation options. These may include things like engravings, whether or not you want a certain feature included (e.g. wire in a face mask), or even products that are completely made to order, rather than providing a set list of variations to choose from.

The most common way to achieve this is to use Variations. When selecting a category for your listing, you will be given a list of relevant attributes to choose from. Instead of selecting one attribute (e.g. ‘Pink’), you can choose ‘I offer more than one’ from the dropdown menu. This will allow you to add preset or custom Variations in the Variations section below, including different prices and quantities for each.

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Another way to offer customisation options is to create a Personalised Listing. Personalisation can be turned on for existing listings using the Listings tab in your Shop Manager. This will allow you to add a text box to your listings where buyers can add the form of personalisation they want, most commonly in the form of a message or word.

Finally, you may wish to offer completely original, made-to-order products without specifying exactly what they will look like or include. To do this, you can allow visitors to your shp to request a custom order by browsing to Settings and then Options in your Shop Manager. This will allow people to click a link and describe an item they’d like you to make. These requests can be declined, but must be completed within 6-8 weeks.

Etsy payment options

Once you’ve described and illustrated your products, you’ll need to lay out the payment options for your shop. In most countries, sellers are recommended to enroll with Etsy Payments. This payment method allows buyers to use a wide range of payment options, including credit and debit cards, PayPal, Apple Pay, Google Pay and more.

Sellers enrolling in Etsy Payments require:

● A residential address in an eligible country;
● A valid bank account in an eligible country, and;
● A valid credit or debit card (unless you are in Austria, Germany or the Netherlands).

Orders purchased using Etsy Payments are subject to payment processing fees, which vary by location. This is on top of the standard $0.20 USD listing fee per item, and the 6.5% transaction cost on sales and postage. Sellers in countries that are not eligible for Etsy Payments may use a private PayPal account, cheques and money orders, or other payment methods.

How to setup PayPal on an Etsy shop

Etsy has its own payment system called Etsy Payments, which includes a number of payment options. By registering for Etsy Payments, customers will be able to choose the payment option that best suits their needs. These payment options include credit and debit cards, Apple and Google Pay, Klarna, and PayPal.

It’s worth noting that unlike using PayPal on many other storefronts, the money from any purchases made using PayPal will go straight into your Etsy Payments account, and will not be reflected in your PayPal account. This means that all of your money is in one place, and you will not be charged extra for PayPal transactions.

An alternative to this is to opt against using Etsy Payments, and to offer PayPal as a manual payment method. This way, your transactions will be processed directly by PayPal, and your money will be sent to your PayPal account. To do this, follow these steps:

● Click the Shop Manager icon.
● Click Finances.
● Click Payment settings.
● Click Enable manual payment methods.
● Change the PayPal option to ‘On’.
● Enter your PayPal email address.
● Click Save.

What type of business is an Etsy shop?

When you start an Etsy store, you will have to consider what type of business it will be. The main question is whether you will be opening an Etsy shop as a hobby, or as a fully-fledged business. In simple terms, if you are planning for Etsy to be your main source of income, you will likely need to register your business as a sole trader.

In most countries, hobbyists do not pay any tax on their earnings, but they also cannot claim any business expenses. Businesses do have to pay tax on their earnings, but they gain a number of protections and other benefits.

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In the UK, Etsy sellers can theoretically earn up to £1000 each year without having to register with HMRC or pay tax, something known as your trading allowance. You also have a personal allowance of up to £12,500 tax-free income each year. This includes all of your income, so if you’re working as well as selling on Etsy, you will likely have to pay tax on your sales.

However, just because you see your Etsy enterprise as a hobby, that doesn’t mean the tax authorities do. In the UK, the HMRC uses ‘badges of trade’ tests to determine whether an activity is a hobby or a business. You are considered a business if you:

● Sell regularly to make an income or a profit
● Buy and retain stock
● Make goods to sell on at a profit
● Are planning ways to increase your income
● Are a registered business on Etsy or other platforms
● Have a website or social media platform to promote your products
● Buy goods at wholesale to sell on for profit
● Are working to or intend to create a brand

As you can see, this means that most enterprises on Etsy and other marketplaces are considered to be businesses! Unless you are only selling the odd item on Etsy and aren’t concerned about making a profit, you should register as a business. The most popular business structures for Etsy shops include:

Sole trader

A sole trader is someone who is self-employed and is the sole owner of their business. Sole traders may keep all of the net profits from their business, but are also responsible for any losses. You’ll need to give your business a name, and include both it and your own name on all official paperwork.

As a sole trader, you will need to keep records of your sales and expenses, pay income tax, and submit a self assessment tax return each year. You will have to register for VAT if your turnover exceeds £85,000, but may register anyway if this benefits you.

Partnership

If you are running your store in conjunction with someone else, you may wish to start it as a partnership. In a partnership, you both share the business’ profits, and pay tax on your share. Conversely, you are also responsible for any losses the business makes, and any business expenses.

When you register a partnership, you must choose a ‘nominated partner’ - in other words, which one of you will be responsible for maintaining the business’ tax returns and records. You can also create what’s known as a limited partnership, where only one partner is liable for debts, but this is much rarer.

Private limited company / Limited liability partnership

If you are serious about turning your Etsy shop into a business and have major long term goals, or want to hire people to help you make and sell goods, you might want to set up as a limited company. A limited company requires more paperwork, but protects your personal assets from any losses you might incur.

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Limited companies can be burdensome for one person, but do tend to be more tax efficient than sole traders, as they pay corporation tax rather than income tax. If this is a partnership, you may also choose the limited liability partnership (LLP) structure, which shares elements of both a partnership and a limited company.

How to promote your Etsy store

As with any online business, marketing and promotion is vital to getting your products seen. While it is likely to be tough to start with, there are a few things you can do to gain a foothold, and get the ball rolling on a successful Etsy shop.

Recruit friends & family

With almost any online business, the trick to gaining your first organic conversions is to secure some from the people you know. By sharing your new shop with friends, family and acquaintances via your personal social media feeds, you can secure some early sales (and most importantly, reviews) that will give your shop some activity and credibility.

Use social media efficiently

Social media is the most obvious tool for Etsy marketing, and particularly platforms that focus on aesthetics, such as Instagram and Pinterest. Building a following on these platforms is notoriously difficult, however, with huge competition and limited discoverability.

While it helps to have friends and family follow your feeds and interact with your posts, don’t expect huge returns early on. Focus on promoting the items you think will perform best on social media, and try to post on a regular schedule, but don’t overextend yourself - social media is not the be all and end all. Instead, focus on honing your presence on Etsy itself, and turning your early customers into repeat visitors.

Use the platform’s tools

Again, the importance of using the tools Etsy gives you can’t be understated. While it may take a while to get to grips with tags, categories, attributes and photos, these are your best route to finding new customers and getting eyes on your shop.

By delivering products with keywords others aren’t using, and making the listings visually appealing, you can beat out the competition with a minimal amount of marketing.

Starting an Etsy shop is a big commitment, and these are just a few of the things you will need to consider. If you are unsure whether your shop qualifies as a business or want to go professional from the start, get in touch with us today, and we’ll be happy to help you set up your business in the UK or if you’re looking further afield, in over 30 countries worldwide.

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