On Friday morning Etsy withdrew money from the bank accounts and credit cards of some sellers without their permission. The amounts of the withdrawals varied, but some were in the hundreds and even thousands of dollars. Etsy quickly refunded the money into the sellers’ Shop Payment Accounts, but the transactions caused some sellers to incur overdraft fees and have their credit cards frozen over the holiday weekend. Some sellers who were hit have expressed concern about whether these transactions will cause tax issues for them in 2019.
One seller, Love Struck Soul, wrote in the Etsy forums, “My bank just canceled my card bc Etsy tried to take over $5000 this morning. I’m standing in the store unable to make a purchase for a crying 5 year old, wth???” Another, Victoria Lynn Boutique, wrote, “Over $7,200 from mine. Can you say BIG overdraft?? Sucks.”
On Saturday Etsy released a statement saying that this issue was not caused by fraud but rather was related to “a site change” and that they don’t expect the error to impact additional sellers going forward.
The incident this weekend with Etsy was certainly alarming, but running a business of any kind means dealing with financial institutions and inevitably there will be errors, double charges, or attempts at fraudulent transactions that impact your account. As a business owner, you can put protections in place to ensure that your business will withstand these incidents and to reduce the impact they have on your personal financial health.
Attorney Kiffanie Stahle runs the artist’s J.D., a website and community that specializes in working with creative business owners on legal issues. “Getting a business bank account is, in my opinion, a must-have for every creative business,” she says. “It puts a fence up between you and your business so if a mistake happens then the money that you’re using for your family to go to the grocery store, to pay your rent and your bills, isn’t being touched.”
Stahle recommends asking your bank whether it’s possible to set up multiple checking accounts. If it is, then create one account that’s just for Etsy income and fees. “This way if something like this were to happen again you’ve narrowed it down to only the Etsy income being impacted,” she says.
If your credit history allows, it’s preferable to have a credit card rather than a debit card for your business. When an unauthorized charge comes in on your credit card you can cancel it much more quickly and easily, even while it’s still pending, than you can with a debit card.
Stahle also points out that many banks will allow you to set up push notifications to your phone when your balance drops below a certain amount or when a transaction comes through that’s above a certain dollar amount. Turning these on will mean that you’re alerted more quickly when something happens.
Another option, Stahle says, is to turn off overdraft protection on your business bank account, or your Etsy-designated checking account. This way if a charge comes through for more than you can cover it will be automatically denied and you won’t be charged an overdraft fee.
Nathan Owen, a Certified Public Accountant in Austin, Texas who specializes in working with small businesses, advises keeping an emergency fund to help cover these sorts of situations. “Ideally you would want to keep an operating reserve in your business account. Depending on your business this could range from a $1,000 buffer to enough cash to cover all of your overhead for month or two,” Owen says. “Things do come up from time to time and having the extra cash to cover an emergency is just good business.”
A few weeks prior to this weekend’s unauthorized charges, Etsy sent letters to some sellers alerting them that they’d issued incorrect 1099s for 2018. Owen says both incidents emphasize how crucial it is for businesses of all sizes to maintain accurate records. “It is important to have a bookkeeper who understands how to classify transactions on a balance sheet,” he says.
According to Owen what happened to the group of Etsy sellers this weekend should not have tax implications because the event was a wash: the cash was withdrawn in error and was immediately returned, but accurate record keeping will be especially important. Both Owen and Stahle recommend staying actively involved in your business financials, checking on your bank statements weekly so that you notice any unusual transactions and can take action quickly.
For those sellers who are looking to open a free business bank account, Stahle recommends either finding a local bank that will work with you or using Nerd Wallet reviews to find on an online bank that matches your needs.
What happened to Etsy sellers this weekend was inexcusable, and Etsy needs to dramatically improve its level of communication with sellers when incidents of this magnitude take place. It was also a wakeup call for sellers who should now take measures to protect themselves so that financial mistakes by Etsy, or other institutions, can be more easily cordoned off and remedied.