Scaling Up Handmade Product Stores on Shopify in 2025

Introduction

Handmade sellers on Shopify are redefining the retail experience—offering unique, quality, handcrafted products directly to consumers. But scaling from hobby to six figures brings IRS responsibilities, especially as 2025 tax rules tighten on digital platforms and self-employed sellers.

This guide helps handmade business owners scale on Shopify while staying IRS-compliant and financially strong.

IRS Tax Codes Relevant to Handmade Sellers

• IRC § 61(a): Requires all income from product sales to be reported
• IRC § 162(a): Deduct ordinary and necessary business expenses, including supplies and marketing
• IRC § 263A: Applies to costs of goods produced by the taxpayer (including raw materials and indirect costs)
• IRC § 6001: Requires organized recordkeeping for all income and expenses
• IRC § 1402: Handmade sellers are considered self-employed and must pay SE tax

IRS Forms for Handmade Shopify Businesses

• Schedule C (Form 1040): Report income and expenses
• Schedule SE (Form 1040): Calculate self-employment tax
• Form 1099-K: Received if Shopify Payments exceeds $600
• Form 1040-ES: For estimated quarterly taxes
• Form 4562: Depreciate tools or machinery used in production

Example: Growth Strategy for a Handmade Brand

Seller: Mia creates handmade soy candles and skincare products on Shopify

• 2025 Total Revenue: $145,000
• Material Costs: $35,000
• Packaging, Branding, and Product Photography: $8,000
• Shopify Fees and Transaction Costs: $4,500
• Marketing (Facebook Ads and Influencers): $12,000
• Equipment (Wax melter and label printer): $2,500
• Net Profit: $83,000

Strategy Summary:
Mia deducts all production and marketing costs under IRC § 162(a) and capitalizes some indirect production costs per IRC § 263A. She uses Form 4562 to depreciate her wax melter. Income is reported on Schedule C, and quarterly taxes are paid using Form 1040-ES.

Step-by-Step Tax Compliance Strategy While Scaling

Separate Business and Personal Finances

1. • Use a business checking account
   • Set up a separate PayPal or Shopify Payments account
2. Track All Income from Shopify
   • Download monthly Shopify sales reports
   • Use Form 1099-K to reconcile gross receipts

Deduct All Legitimate Business Expenses

• • Supplies, ads, shipping, packaging, web hosting
  • Deduct on Schedule C, Line 27 (Other Expenses) or Line 8 (Advertising)

Apply Capitalization Rules for Self-Production

• • Include direct and indirect materials in COGS under IRC § 263A
  • Consider hiring a CPA to help with cost allocation methods

Depreciate Long-Term Tools and Equipment

• • Claim depreciation on production equipment using Form 4562

Make Quarterly Estimated Tax Payments

• • Use Form 1040-ES to avoid underpayment penalties
  • Adjust quarterly based on seasonal sales trends

Maintain Organized Documentation

• • Keep records for 3+ years as required by IRC § 6001
  • Use bookkeeping software integrated with Shopify (e.g., QuickBooks or Xero)

Conclusion

Scaling a handmade business on Shopify in 2025 means more than growing orders—it means growing into a real business. By applying IRS rules to your operations early, you can scale smoothly, keep more of your profits, and avoid year-end surprises. Growth and compliance go hand in hand.

Call to Action

Are you scaling your handmade business on Shopify and unsure about the tax side?

Schedule a meeting with Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent, and cross-border tax expert. He helps handmade sellers transition from passion projects to profitable, IRS-compliant businesses.

• Schedule a meeting: https://calendly.com/anshulcpa/
• Email: anshul@kkca.io
• Website: www.kkca.io

About Our CPA

Anshul Goyal, CPA EA FCA, is a U.S. Certified Public Accountant, IRS Enrolled Agent, and Chartered Accountant with over 15 years of experience. He has helped 2,000+ clients scale online businesses and saved over $200 million in taxes—especially in the handmade and creative space.

Disclaimer

This blog is provided for general informational purposes only and does not constitute legal, tax, or accounting advice. Please consult a licensed tax professional for personalized guidance.

FAQs (Top 5 High-Searched Questions)

1. Do I need to pay taxes if my Shopify store sells handmade products?
Yes. All business income must be reported under IRC § 61(a), even for handmade items.

2. What expenses can I deduct as a handmade seller?
You can deduct raw materials, packaging, marketing, platform fees, and software under IRC § 162(a).

3. Do I need to capitalize my production costs?
Yes, in most handmade businesses. IRC § 263A requires capitalization of certain direct and indirect costs.

4. Can I depreciate my production tools?
Yes. Use Form 4562 to depreciate machinery or tools used in creating products.

5. How do I pay taxes if I don’t receive a paycheck?
You must file Schedule C and make quarterly estimated payments using Form 1040-ES.