You list a handmade mug at $34, it sells within a week, and Etsy deposits about $27 into your payment account. After clay, glaze, kiln time, the box, and the shipping label, did you actually make money — or did you pay for the privilege of making it? Most Etsy sellers cannot answer that question per listing, and that blind spot is where handmade profits quietly disappear.
This guide walks through tracking cost of goods sold (COGS) the way an Etsy shop actually needs it: materials, labor, Etsy fees, and shipping, each in its own bucket, with a per-listing worksheet you can reuse and a year-end routine that keeps your tax return honest.
What Counts as COGS for an Etsy Seller
Cost of goods sold is the direct cost of the items you sold during the year — the costs that exist because you made and sold those specific products. For a maker, that means three things:
- Direct materials: clay, yarn, fabric, beads, wood, candle wax, fragrance oil, packaging that ships with the product, and the inbound freight to get those supplies to your door.
- Direct labor: wages you pay to someone who helps you make the products — an assistant who pours candles, sews linings, or sands and finishes pieces.
- Other direct costs: kiln firing fees, studio time billed per piece, or subcontract work on the product itself.
Two things sellers routinely get wrong: your own labor and Etsy fees. As a sole proprietor, the IRS does not let you deduct the value of your own time on Schedule C — your profit is your pay. And Etsy fees are not COGS at all for tax purposes; they are selling expenses (commissions and fees) reported separately in Part II of Schedule C. That distinction matters at tax time, and this post keeps the two straight throughout.
For pricing decisions, though, you absolutely should count your time and every fee. Tax categories tell the IRS what happened; your per-listing math tells you whether to keep selling the mug.
Bucket 1: Materials Down to the Gram
Materials are the easiest bucket to underestimate because handmade supplies arrive in bulk and leave one piece at a time. The fix is unit costing: figure out what one finished item consumes, then multiply.
Start with your three to five most expensive inputs per listing. A candle maker weighs wax and fragrance oil per pour; a jeweler counts beads, wire, and findings per piece; a potter tracks clay weight and glaze per firing load. Divide the bulk purchase price by the number of finished units it yields, and include a waste factor — broken bisqueware, miscut fabric, and failed pours are real costs, and 5 to 10 percent waste is normal for handmade work.
Do not forget the consumables that ride along with the product: the box, tissue paper, stickers, care cards, and tape. If it goes into the mailer, it is a direct cost of that sale. Likewise, the shipping you paid to receive your supplies (inbound freight) belongs in materials cost, while the shipping you pay to send orders out belongs in Bucket 4.
A simple rule: if you would not have bought it had you not made that item, it is materials cost.
Bucket 2: Labor — Paid Help for Taxes, Your Time for Pricing
If you pay someone to help produce your goods, their wages for production hours are part of COGS (Schedule C, line 37, Cost of Labor). Track production hours separately from admin hours — time your assistant spends photographing listings or answering convos is a general business expense, not COGS.
Your own time works differently depending on the question you are asking:
- Tax return: your labor is not deductible. Do not add a line for it anywhere on Schedule C.
- Pricing and profitability: value your time at a real hourly rate and include it in every listing's cost. Sellers who skip this step routinely discover they earned less than minimum wage on their best sellers.
Pick an hourly rate deliberately — what you would pay a skilled craftsperson, not $5 an hour to make the math work — and time yourself across several production runs. Batch work hides per-unit time well, so time the whole batch and divide by finished units.
Bucket 3: Etsy Fees Without the Mystery
Etsy fees are where most sellers lose track, because several small charges stack into a double-digit percentage of every sale. For a US seller, the standard stack looks like this:
| Fee | 2026 rate | When it hits |
|---|---|---|
| Listing fee | $0.20 per listing | On publish, on each sale (auto-renew), and every 4 months |
| Transaction fee | 6.5% of item price plus shipping and gift wrap | On every sale |
| Payment processing | 3% plus $0.25 per order | On every sale |
| Offsite Ads (optional) | 12% or 15% of attributed sales | Only on sales Etsy attributes to its offsite ads |
| Etsy Plus (optional) | $10 per month | Monthly subscription |
On a typical order, the unavoidable fees land around 10 to 12 percent of the total before shipping labels, Etsy Ads spending, or Offsite Ads. Two details catch sellers off guard. First, the 6.5 percent transaction fee applies to the shipping amount you charge the buyer too — raising "free shipping" prices to cover postage also raises the fee base. Second, the listing fee renews automatically each time a multi-quantity listing sells, so a listing that sells 50 units quietly incurs $10 in listing fees over its life.
For your books, record the gross sale as revenue and each fee as its own expense. Etsy deposits the net amount, but your Schedule C gross receipts (line 1) must show what the buyer paid, with fees deducted as commissions and fees. Downloading your monthly Etsy payment account CSV and reconciling it against deposits is the habit that makes this painless — and if you want those numbers in a ledger you fully control, Fava's dashboards make it easy to visualize fee trends month over month.
Bucket 4: Shipping — Both Directions
Shipping touches your books twice, in two different places:
- Inbound shipping (supplies to you): part of materials cost, folded into COGS.
- Outbound shipping (orders to buyers): the postage and label fees you pay are a business expense, while any shipping amount the buyer pays you is part of your gross receipts.
The trap is "free shipping" listings. When you fold $6 of postage into the item price, that $6 is revenue, the actual label cost is your expense, and the transaction fee applies to all of it. Track label costs per order for a month and compare them to what you collected — sellers are regularly surprised by how much dimensional weight and zone jumps eat on heavier items. Buying labels through Etsy versus a third party changes the fee picture slightly, so record the label source alongside the cost until you know which is cheaper for your typical parcel.
A Worked Example: The $34 Stoneware Mug
Here is how the four buckets come together for a potter selling a handmade stoneware mug at $34 with buyer-paid shipping of $8:
- Materials: clay, glaze share, kiln firing share, box and packing — $4.80
- Your time (pricing only): 25 minutes at $24 per hour — $10.00
- Etsy fees: $0.20 listing renewal, 6.5% of $42 ($2.73), 3% plus $0.25 processing ($1.51) — $4.44
- Outbound shipping: label cost $7.10 against $8.00 collected — net $0.90 kept
Total cost against the $42 the buyer paid: about $19.24 in product and fee costs plus $7.10 in postage, leaving roughly $15.66 before income and self-employment tax — and only because the seller's time was priced in. Drop the labor line and the same mug looks twice as profitable as it is, which is exactly how underpricing survives for years.
Build this as a one-row-per-listing worksheet: columns for materials, labor, fees, shipping, total cost, price, and margin. Update it whenever supply prices move — and they will.
The Year-End Routine: Inventory Counts and Schedule C
If making or buying goods is an income-producing part of your business, the IRS expects you to track inventory and compute COGS in Part III of Schedule C: beginning inventory, plus purchases, labor, materials, and other costs, minus ending inventory. That single ending-inventory number is why a year-end count matters — every finished mug and every bag of clay on the shelf at midnight on December 31 reduces this year's COGS and carries the cost into next year.
Make it a half-day ritual:
- Count finished goods and value them at what they cost you to make (materials plus paid production labor), not at retail price.
- Count raw materials and supplies on hand at purchase cost.
- Photograph the counts and save them with your tax records.
- Reconcile the full year of Etsy deposits against gross sales plus fees, so gross receipts tie out.
Sellers with average annual gross receipts under the small-business threshold may use simpler approaches to accounting for inventory, but you still need some consistent method and a count to support it. When in doubt, ask your tax preparer before filing season — January is a bad time to reconstruct December's shelves from memory.
Five Mistakes That Distort Every Number
- Recording the Etsy deposit as revenue. The deposit is net of fees. Report gross sales and deduct fees separately, or both your revenue and your expenses are understated.
- Putting Etsy fees in COGS. Fees are commissions and selling expenses, not product costs. Mixing them into COGS understates gross profit and misstates your return.
- Ignoring shipping the buyer pays. Shipping charged to the buyer is part of gross receipts, and the transaction fee applies to it. Leaving it out understates both sides.
- Valuing your time at zero. Fine for the tax return, fatal for pricing. Your time is the largest cost in most handmade goods.
- Skipping the year-end count. Without ending inventory, your COGS is a guess — and guesses favor neither accuracy nor audits.
Keep Your Finances Organized From Day One
As your Etsy shop grows from a hobby into real income, maintaining clear financial records is what separates a stressful tax season from a routine one. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
