There is no denying the scale and opportunity Amazon offers online sellers. Amazon processes over 26.5 million transactions a day, making them an obvious choice for many ecommerce sellers. The whole process of setting up your Amazon store is pretty simple and straightforward, and once you get going, you can generate a really solid income stream. However, once the money starts coming in, you will need to consider your tax situation. Amazon taxes can get a little confusing for many. Not only will you owe taxes on your income, but you will also need to pay attention to sales tax rate. Here are some Amazon tax basics that every eCommerce seller should know.
What Amazon Taxes Are There?
Taxes are an inevitable part of running a business. As a business-owning or selling goods on Amazon, you will need to pay taxes on your income as well as remit sales tax. Many online sellers will owe sales tax in multiple states, which if you run a busy store, may get a little hectic to track. This is where a good accounting system comes in handy.
Income Tax – Amazon Sellers
Anytime you generate an income, Uncle Sam wants his piece of the pie. As an online seller, taxes don’t apply to your income like a typical employee. In the eyes of the IRS, you are self-employed, which means you are responsible for calculating and remitting the Amazon taxes you owe. It is important to accurately calculate the taxes you owe and pay them on time.
Self-employed individuals may find they owe estimated taxes. These represent the withholdings and employer would have deducted from your paycheck. Estimated taxes are due on a quarterly basis. You could owe estimated taxes if you anticipate owing more than $1,000 in Amazon taxes. In addition, you could also owe self-employed tax. This 15.3% tax makes up the employer and employee portion of Social Security and Medicare contributions.
Amazon sellers may or may not receive a 1099 K. A 1099 K is an information return and is issued by third-party payment processing companies like Amazon or Shopify. Only sellers who generate more than $20 K in revenue and have over 200 transactions will receive a 1099 K. If you do not receive a 1099 K, you must still report your income. You will have to run your own financial reports to determine your taxable income. However, if you do receive a 1099 K be sure to accurately report the income, as the IRS also receives a copy of the Form 1099.
Sales Tax – Amazon Sellers
For many sellers, sales tax can get tricky. One of the biggest reasons sales tax is so confusing is that sales tax varies from state to state and city to city. For example, the state sales tax rate in CA is 7.25% however, in the city of Los Angeles the sales tax rate is 9.5%. If you conduct business in multiple states, sales tax compliance can become quite a headache. Not paying attention to your sales tax compliance can result in penalties and run in with state tax authorities.
With Amazon fulfillment centers popping up all over the place, many sellers are finding that they have nexus in more states. This creates an Amazon tax obligation for those sellers. In turn, Amazon sellers will need to apply for a sales tax permit in each state they have nexus. After recent legislation, Amazon will calculate and collect sales tax on behalf of sellers in most states. Amazon charges a 2.9% transaction fee to collect sales tax.
Do Online Sellers Have to Pay Taxes on Amazon Sales?
A steady stream of income is always taxable. Some sellers may sporadically sell items online. However, typically, this type of sale does not trigger a tax obligation. Most of the time, sellers resell these items for less than their original value. These types of situations are more like a yard sale because they are not consistent. However, once you start selling on a regular basis with the intent of generating an income, you create an Amazon tax obligation.
Sales Tax Reporting
In general, the IRS wants all income reported for taxes, however, the rules regarding sales tax are not as straightforward. This is due to the fact that not all states charge sales tax, and the sales tax rate varies from state to state and city to city. Currently, there are 5 states that do not charge sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
The new legislation enables Amazon to collect sales tax on sellers’ behalf, but you still need to know where you maintain a nexus. Failure to stay on top of updates could cause some sales tax compliance issues for your business down the road. Fortunately, there are some tools that can help you stay compliant. Avalara Tax Compliance software and Tax Jar, both of which can help you apply to the applicable state tax authorities, help you calculate the correct amount in sales tax to remit. You can learn more about Amazon sales tax here.
Self-Employment Tax – Amazon Sellers
As mentioned above, as an Amazon seller, you are self-employed, and therefore liable for self-employment tax. Self-employment tax is assessed to those who do not have any Social Security or Medicare tax withheld from their pay. The self-employment tax rate is 15.3% which makes up the employer and employee portion of Social Security and Medicare contributions. Half of which (the employer portion) is a deductible business expense.
The IRS considers all income streams taxable, so the revenue you generate on Amazon does generate a tax obligation. However, how you file your Amazon taxes will largely vary on how your business is structured. The most common ways to structure a business include: sole proprietorship, LLC, S Corp, and C Corp. As a sole proprietor, you file as an individual and can file Form 1040. Single-member LLCs can file 1040 along with a schedule C, E, or F. Multi-member LLCs should file Form 1065, and S Corps and C Corps must file a Form 1120. Keep in mind that corporate revenue can be subject to double taxation, meaning it is taxed at the corporate level as well as at the individual level.
Do I Need a Sales Tax Permit for Amazon?
In order to remit sales tax to the appropriate authorities, you will need to apply for a sales tax permit in every state you have nexus. Nexus is determined as having a physical presence or reaching a certain sales threshold. With Amazon fulfillment centers located all over the country, Amazon sellers need to be particularly careful at monitoring where they have nexus. If nexus is determined in one of the 45 states that levy sales tax, they will need to get a permit from the sales tax state authorities.
How to Apply for an Amazon Sales Tax Permit
The first thing you need to do is ascertain where you have nexus. Consider outside states where you might have merchandise being stored, or states where you have high volumes of sales. When nexus is triggered, you will need to collect sales tax and remit it to the proper authorities. Which will require you to apply to those state boards of equalization. However, just like sales tax rates vary from state to state, the process of obtaining the appropriate tax permit also varies. Some states are more expensive and have an extensive list of paperwork they need filed, while other states have a more streamlined and less expensive process. Sales tax management tools like the ones we mentioned above can help automate the entire process.
Aside from sales tax, another thing you need to consider for compliance purposes is your business permit. Business permit laws also vary from state to state, county to county, and city to city. Some jurisdiction may not require you to have one if you don’t have a physical storefront. You need to research the local laws in your area.
As an online seller, a reseller’s permit is also a good idea, as it allows you to purchase goods tax-free for the purpose of resale. Typically getting a reseller’s permit is pretty easy to obtain. However, it does need to be maintained.
Why Is Amazon Tax So High?
After the South Dakota vs Wayfair lawsuit, 43 states enacted online sales tax laws, which is why Amazon collects and remits sales tax on behalf of the seller in most states. Since tax rates vary from state to state, your sales will be subject to different rates. On top of that, Amazon charges a 2.9% processing fee.
Amazon Tax Deductions
Tax deductions are the best way to lower your Amazon tax liability. As a small business owner, you will naturally incur ongoing expenses to maintain your business, most of which are tax deductible. Any expense that is necessary and ordinary to your business is also a deductible expense. This can include expenses like home office expenses, office supplies, shipping expenses, travel expenses, continued education costs, marketing, subscriptions, cost of goods sold, depreciation, professional fees, merchant fees, and more. It is important to keep track of your expenses and properly categorize them, as deductions work to lower your taxable income, thereby reducing your tax bill.
When to Hire an eCommerce Accounting Professional
Staying on top of your bookkeeping is one of the most important things for your business. For some, this can be the most challenging part of running their business. It can be tedious, and oftentimes accounting tasks get put on the backburner, which can be a real drag when it comes to business forecasting and budgeting. Not to mention it can really complicate things when it comes time to do your Amazon taxes. What’s more, you really want to make sure your accounting is accurate. Accounting mistakes can be costly and time-consuming to correct. For example, if there is an entry error with your inventory, you could end up with too little or too much inventory. This can lead to missed sales or cash tied up in inventory that isn’t moving. Either way, it’s a lose-lose situation.
Growing sales is great for your bottom line, but it also leads to more work. In which case you may need to hire some help, which can complicate your Amazon taxes a bit more. If you have employees or work with independent contractors, you will need help monitoring your payroll and issuing 1099’s. In addition, growing sales could trigger more nexus, in which case you will need to be sure you are collecting and remitting sales tax appropriately to avoid penalties. Growing sales can also mean more money being spent to maintain your shop, which in turn can result in more tax deductions. If business is booming, you really need to consider your tax planning, which includes creating a tax savings account and strategizing deductions.
In the early stages of business, Amazon taxes are often simpler. But as the business grows, so does your tax burden. The more money you make, the greater your taxable income is, and the more deductions you probably have. You want to make sure you don’t miss any deductions or tax credits that can significantly lower your tax obligation.
Staying on top of the ever-changing laws in regards to taxes is a full-time job as well which many small business owners simply do not have the time for. Failure to stay up-to-date on the latest can be costly. If you have a lot of out-of-state business, it is in your best interest to work with a SALT accountant who specializes in state and local taxes.
Takeaways: Amazon Tax Compliance
For eCommerce sellers, Amazon is a great place to get started. They make the entire setup process easy to understand, and they have millions of visitors a day which can automatically expand your reach. However, in order to be successful, you must pay attention to your Amazon taxes. Failure to do so can lead to a surprise tax bill and costly penalties. Working with a tax advisor can help ensure that you are Amazon tax compliant. Determining where you have nexus and which tax laws apply in those jurisdictions can be quite challenging. In addition, a tax advisor can also ensure that you are getting every tax deduction and tax credit that you qualify for, lowering your tax obligation. To learn more, contact one of the Amazon tax and accounting experts at My Tax Hack today. For more tax tips, subscribe to our newsletter.