The internet offers a lot of opportunities for people to generate an income by selling things on sites like Amazon or eBay. There are a couple of different types on online sellers: 1) people who resell household items a couple of times a year and 2) people who sell items on a regular basis generating a substantial income. While some only want to generate a small side income, others generate higher volume. So, at what point do online sellers need to start thinking about their potential tax obligation? Here are some tax tips for eBay and Amazon FBA sellers.
Do eBay and Amazon FBA Sellers Have To Pay Taxes?
The IRS wants all income reported, both business and personal, this includes income Amazon FBA and eBay sellers generate as well. As a general rule of thumb, if you are selling items online generating a steady income you should report the income to avoid penalties from the IRS. The same rules that apply to brick and mortar stores, apply to online sellers. On the other hand, if you are simply reselling used household items here and there, and generating less than $400 in income, it is not necessary to report the income.
For sellers generating 200 transactions a year and 20k in revenue, Amazon, Shopify, and Paypal will issue a 1099-K as required by the IRS. If you receive a 1099-K for your online transactions, you will definitely want to report the income on your taxes. In addition, it is important to make sure the income you are reporting is the same as the income reported on the 1099-K. When reporting income to the IRS, both monthly and annual income is required. This helps prevent any discrepancies.
How Much Do You Owe In Taxes?
There is a lot that goes into calculating how much you down in taxes, and unfortunately it isn’t a one size fits all. Which is why it is important to work with a professional tax accountant. As an online seller, you will be required to pay:
- Self-employment tax
- Income tax
- Sales and use tax
Self Employment Tax for eBay and Amazon FBA Sellers
The self employment tax represents the taxes your employer would have withheld for social security and medicare. Since online sellers are not employed and are engaged in an “active trade or business” the income from selling online is classified as self-employment income and therefore is subject to a 15.3% tax on profits. Self-employment taxes are made up of a 12.4% tax going towards social security and a 2.9% tax for medicare.
The net profit is calculated for sole proprietors on a Schedule C where you show revenue and expenses. The net profit that you made is then reported to your total income on your tax return which will include all other sources of income. Income tax is further described below.
Income Tax for Amazon FBA and eBay Sellers
Income tax is calculated by figuring the adjusted gross annual income. Then subtracting any adjustments to gross income and exemptions, calculating liabilities, and applying credits. The rate with which you pay will depend on what tax bracket you are in. On average, most Americans fall within the 22% – 32% income tax brackets.
Sales Tax for Online Sellers
Online sellers also have to pay sales tax. Sales tax is levied by the state, and is used to fund the state’s General Fund, which allows the state to pay its bills. Sales taxes also fund local cities and municipalities, which
support public safety services as well as health and social services. In California, the base sales tax rate is 7.25%, with 6% going to the state and 1.25% going towards the locality. Many localities impose additional sales tax known as a district tax, to fund local projects approved by the voters.
Calculating the sales tax owed will depend on where you conduct business or where you have nexus. For California, online sellers who ship solely from California the sales tax remains the same, 7.25% or higher if the city they live in imposes a district tax. However, for Dropship sellers who have multiple shipping facilities in different state, they may subject to pay each individual states sales tax where they have nexus. Sales taxes can also be based on where you sell, which is why reporting sales tax based on zip code, can be needed when reporting.
Use tax is similar to sales tax, but it applies to out of state purchases where no sales tax was levied. This applies to goods that are used, consumed, or stored in the state of California, where no sales tax was collected at the time of transaction.
What Are The Deductions I Can Claim?
One of the best tax tips is knowing which deductions you can take against your net profit. Deductions are a saving grace for many online sellers, as they help reduce their tax liability for self-employment taxes and income taxes. There are many tax deductions available to online businesses. Some of the most common are:
- Marketing and advertising expenses
- Shipping expenses including supplies and postage
- Business related travel expenses
- Home office including partial rent for dedicated work space
- Internet and phone expenses
- Selling costs including processing fees for sites like Shopify
- Costs of goods sold
When it comes to taxes, having a professional handle your taxes makes a huge difference. For starters you don’t have to navigate the complex landscape that is our tax code yourself, and you can rest assured that all available deductions will be applied, lowering the amount you owe and increasing your profits. For more tax tips for Amazon FBA sellers subscribe to our newsletter!