Tax season has arrived and it’s time to get your Amazon FBA business ready! While most people procrastinate on anything that has to do with tax preparation, as a business owner, the more prepared you are the better. Here is a quick rundown on how to file your Amazon FBA taxes so that you know what to expect from the process.
Do I Need to File Taxes?
The short answer is yes. Any income that you earn from Amazon need
s to be reported to the IRS and other tax authorities. You should also know that if you earn over $20,000 in gross sales or have more than 200 transactions, Amazon will file an automatic 1099-K with the IRS to report your seller activities. Therefore, as a rule, the government will automatically know that you are running a business.
Tracking Your Income and Expenses
First, we can’t stress enough the importance of maintaining a dedicated account for your Amazon FBA taxes and business. We advise getting a separate bank account as well. Even if you are a small-scale seller on the platform, keeping everything separate will make it much easier for you to figure out your income and expenses in order to prepare your taxes.
Additionally, you should keep the invoices from sales and receipts from purchases that you make throughout the year. This will make it easier for you to track minor expenses, allowing you to easily identify potential deductions which could help to lower your tax bill.
Some common deductions on Amazon FBA taxes for sellers include:
- The cost of inventory for your FBA business
- Amazon commission fees
- Software and FBA subscription fees
- Shipping and office supplies
- FBA seller continuing education courses
- Home office deduction
- Business-related travel
- Health insurance plans
- Retirement plans
Scan your physical receipts and keep backup copies of any email receipts that you have. This will save you a lot of time so that you don’t have to search through drawers and email inboxes to find the information that you need during tax time.
Paying Sales Tax
In addition to federal and state income tax, you will need to file sales taxes in the states where you have nexus. The good news is that as an Amazon FBA seller, Amazon will collect sales tax on your behalf. However, it is still up to you to make sure that any sales tax returns get filed on time, which will be filed with the states where you sell. Generally, sales tax returns are due on an annual, quarterly or monthly basis.
What Is Nexus?
Nexus is defined as the place where Amazon FBA stores your physical products. That means that you have nexus in any state where there is an Amazon Fulfillment Center that stores or ships your products to customers. In addition, you also have nexus in your home state where you live as the owner of the business. This is especially true if you maintain any kind of office or business-related facility.
You should be aware of the fact that Amazon currently has fulfillment centers in 20+ states which means that you could potentially have nexus in more than one state. If you do have nexus in one or more states, contact the tax authority in each of those states in order to determine what your filing requirements are.
Do All States Charge Sales Tax?
If you’ve gotten lucky enough to have your business and your Amazon FBA orders ship from states that do not charge sales tax, then you may not have to file at all. The five states that do not levy sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. However, this is misleading because while these states do not levy a statewide sales tax, they do allow local sales tax which some local jurisdictions have opted to do.
Additionally, many states charge sales tax on certain categories of products while exempting others from sales tax, such as food. So make sure that you check your filing requirements carefully to ensure that you are paying the correct rates in each state.
The penalties for failing to file sales tax returns are very high in many states and could have a major impact on your Amazon FBA business if it is determined that you owe and did not pay sales tax on your sales.
File Your Federal and State Income Tax Returns
Next, you need to file your federal and state income tax returns. This part of the process is a bit easier because you will only need to file in the state where you do business.
The state where you do business is the state in which you registered your business entity (e.g. corporation or LLC) or the state in which you reside if you are operating your business as a sole proprietorship. Like sales tax, state income tax is required in most states, though some states do not have this tax. The following states are the states with no income tax:
- South Dakota
For your federal return, refer to the IRS.gov website for the proper forms and instructions needed to file income tax for your particular situation.
How to Calculate Your Net Income
Your net income can be calculated by starting with your total earnings from the sales you made (gross income). From the gross income, subtract your business expenses and operating costs. This will give you the earnings of your business before tax (taxable income). After you subtract the amount of tax you owe from your taxable income, the end result is your net income.
Why is your net income important? Your net income is your profit and a positive net income means that you actually earned money from your business. On the other hand, a negative net income means that your business lost money overall.
One important thing to know is that the IRS wants to know your gross income, which includes shipping charges when it comes to Amazon FBA sales. To avoid under-reporting your income on your federal and state returns and putting yourself at risk of an audit, make sure to report every dollar that comes in from Amazon.
Get Help With Your Amazon FBA Taxes
Filing taxes as a small business owner can be tricky. That is why it is always a good idea to get a handle on things by planning ahead. If this task seems like a lot to take on, don’t be afraid to ask for help. It is always a good idea to consult a tax professional when it comes to business taxes.