Quick Answer
Cost of Goods Sold (COGS) for Etsy sellers includes materials, labor, and overhead costs directly tied to creating products. For a handmade jewelry seller earning $50,000, proper COGS tracking could reduce taxable income by $15,000-25,000, saving $2,300-3,800 in self-employment taxes alone.
Best Answer
Alex Torres, Former gig worker, tax educator
Best for sellers with consistent inventory and established processes who need to optimize their COGS calculation
What counts as Cost of Goods Sold for Etsy sellers?
Cost of Goods Sold (COGS) includes all direct costs to create your products that you sell on Etsy. This covers three main categories: materials, labor, and manufacturing overhead directly tied to production.
Direct materials are the raw materials that become part of your finished product. For a jewelry maker, this includes beads, wire, clasps, and packaging. For a candle maker, it's wax, wicks, fragrance oils, and containers. The key test: if you can't make the product without it, it's likely COGS.
Direct labor is trickier for solo Etsy sellers. If you pay employees or contractors to help make products, their wages are COGS. If you're working alone, you generally can't deduct your own labor time as COGS — your profit is your compensation.
Manufacturing overhead includes costs directly related to production but not tied to specific products. This might include equipment depreciation (your pottery wheel, sewing machine), utilities for your dedicated workshop space, or shipping supplies.
Example: Handmade jewelry business COGS calculation
Let's say Sarah runs a jewelry business and sold $50,000 worth of products in 2026:
Beginning inventory (Jan 1): $3,000 in raw materials
Purchases during year: $18,000 in beads, wire, findings, boxes
Ending inventory (Dec 31): $4,000 in unused materials
Additional COGS: $2,000 in shipping supplies, $500 equipment depreciation
COGS calculation:
Beginning inventory + Purchases - Ending inventory + Other direct costs
$3,000 + $18,000 - $4,000 + $2,500 = $19,500 COGS
This reduces Sarah's taxable income from $50,000 to $30,500, saving her about $2,993 in self-employment tax (15.3% of $19,500) plus federal and state income tax savings.
Key components of COGS for different Etsy businesses
What NOT to include in COGS
Inventory tracking requirements
According to IRS Publication 334, businesses with inventory must use the "accrual method" for purchases and sales of inventory items. This means:
What you should do
1. Set up inventory tracking immediately — Use a simple spreadsheet or tools like the freelance-dashboard to track purchases and ending inventory
2. Save all material receipts — Digital photos work fine, but categorize them properly
3. Do a physical count December 31 — Count everything: finished products, raw materials, partially completed items
4. Separate COGS from business expenses — Don't mix materials costs with marketing or fees
Key takeaway: Proper COGS tracking typically reduces taxable income by 35-50% for product-based Etsy businesses, translating to $2,000-5,000+ in tax savings annually for profitable sellers.
*Sources: [IRS Publication 334](https://www.irs.gov/pub/irs-pdf/p334.pdf) (Tax Guide for Small Business), [IRS Publication 535](https://www.irs.gov/pub/irs-pdf/p535.pdf) (Business Expenses)*
Key Takeaway: COGS for Etsy sellers includes direct materials, manufacturing overhead, and contractor labor — typically 35-60% of revenue depending on your product type.
Common COGS percentages by Etsy business type to help sellers benchmark their costs
| Business Type | Typical COGS Items | Average COGS % of Revenue |
|---|---|---|
| Handmade jewelry | Beads, wire, findings, boxes, display cards | 35-50% |
| Candles | Wax, wicks, fragrance, containers, labels | 40-60% |
| Clothing/textiles | Fabric, thread, buttons, zippers, tags | 45-65% |
| Digital products | Platform fees, design software subscriptions | 5-15% |
| Print-on-demand | Base product costs, printing fees | 60-80% |
More Perspectives
James Okafor, EA, EA
Best for sellers just starting out who need to understand COGS basics and set up simple tracking systems
COGS basics for new Etsy sellers
If you're new to selling on Etsy, Cost of Goods Sold might sound complicated, but it's actually straightforward: it's what you spent to make the things you sold.
Think of it this way — if you made 100 bracelets and sold 80 of them, you can only deduct the materials for those 80 bracelets. The materials for the remaining 20 stay in "inventory" until you sell them next year.
Simple tracking for beginners
You don't need fancy software. A basic spreadsheet with three columns works:
At year-end, count what you have left and subtract that from total purchases.
Example for a small candle business
Mike started making candles in July 2026:
His COGS: $800 - $160 = $640
This $640 reduces his taxable income, saving him about $98 in self-employment tax plus income tax.
Don't overthink it your first year
Many new sellers get paralyzed trying to track everything perfectly. Start simple:
1. Save receipts for anything that goes into your products
2. Count leftover materials December 31
3. The difference is your COGS
You can get more sophisticated as your business grows.
Key takeaway: For new Etsy sellers, COGS is simply materials bought minus materials left over — start with basic tracking and improve your system as you grow.
Key Takeaway: Start simple with COGS tracking — save material receipts, count leftovers at year-end, and deduct the difference from your taxable income.
Alex Torres, Former gig worker, tax educator
Best for people who have a day job and sell on Etsy as additional income
COGS for side hustlers: keeping it separate
When you have a W-2 job and an Etsy side hustle, COGS only applies to your Etsy business. Your regular job income isn't affected, but proper COGS tracking on your side business can significantly reduce the tax bite on that extra income.
Why COGS matters more for side hustlers
Side hustle income gets hit with self-employment tax (15.3%) on top of regular income tax. If you're already in the 22% tax bracket from your day job, every dollar of Etsy profit faces about 37% total tax. But every dollar of COGS reduces that tax burden.
Example: Teacher with Etsy jewelry business
Jenna teaches full-time ($55,000) and sells jewelry on Etsy evenings and weekends:
Without COGS tracking, she'd owe about $2,964 in taxes on $8,000 (37% rate).
With proper COGS, she owes about $1,924 on $5,200 net profit.
Tax savings from COGS tracking: $1,040
Keep business and personal completely separate
Schedule C vs. hobby rules
If you're profitable in 3 of 5 years, the IRS presumes you're running a business (not a hobby). This matters because:
Most successful Etsy sellers want business treatment for better tax benefits.
Key takeaway: Side hustlers face the highest tax rates on extra income, making COGS tracking even more valuable — often saving 37¢+ per dollar of properly tracked costs.
Key Takeaway: For W-2 employees with Etsy income, COGS reduces the highest-taxed dollars you earn, often saving 35-40% per dollar of materials costs.
Sources
- IRS Publication 334 — Tax Guide for Small Business - Inventory and COGS rules
- IRS Publication 535 — Business Expenses - What qualifies as COGS vs. business expense
Related Questions
Reviewed by James Okafor, EA, EA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.