Not sure what all is going on here, or with Etsy's guidelines, but it sounds as if when you or they are resizing your pictures, you're not preserving the aspect ratio. If they are appearing distorted, make sure that whatever program you're using to resize has the "preserve aspect ratio" option ticked.
I can understand your confusion. I went to the Etsy site and it's a jumble. It looks, though, as if they may be forcing a 4:3 aspect ratio on some pictures at least. If this is the case, you may first have to crop any image of yours to that ratio to avoid distortion. Then try to follow their guidelines for overall dimension (and for byte count) for the final result.
For a freeware program that does both resizing and fixed-ratio cropping, you might try Faststone Image Viewer. You can first crop to the original or a specified ratio, and then resize. This program also, by the way, is the only such program I've found that reliably sets image rotation so it is correct in all programs that read it.
