“Should I file taxes for my eBay business?”
Every eBay seller out there has asked themselves this question at least once.
Curious? Here’s how you do it…
This week, we’ll feature some of the emails we’ve received from our blog readers and subscribers. Among those we’ve received recently was the question about whether or not filing taxes on their eBay business is necessary:
“Hello, Rival Ripper! I’ve been selling on eBay for a year now and thankfully, I’ve made more than 250 transactions since I started. Because of my consistent sales, I’m thinking of quitting my day job to become a full-time eBay seller. My only concern is that I don’t know if I should be filing taxes for my eBay business or not. It feels wrong not to pay taxes like a normal business. I might be breaking a few laws without knowing. I’m also not sure if eBay requires sellers to pay taxes from eBay income. I want to create steady profit around my eBay business, but I don’t want to get in trouble with the law. Can you give me some helpful advice?” — Will C.
Filing tax based on eBay income is not always necessary. There is no one-paragraph answer to provide Will with the details of what he wants to know. Also, we are NOT tax attorneys and nothing we say on this page should be taken as tax advice so make sure to do proper due diligence. We can however provide some information that eBay gives us as well as some information from our experience selling on eBay.
Should I file taxes for my eBay Business?
The first step to paying eBay taxes is determining whether you’re required to do so. Not everyone selling on eBay is obliged to pay taxes from eBay sales. Occasional sellers who don’t intend on making eBay a consistent source of income are generally exempt.
The following is a recommendation from eBay/Paypal. If your business applies to any of these you should consider filing taxes.
- The seller should have had more than 200 transactions on eBay in the year
- The business should have had over $20,000 as a sales “revenue” minimum for the year. Paypal will most likely send you tax documents if this is the case.
- If the seller has employees and/or has an Employer ID Number (EIN)
- If seller is incorporated (Sole Proprietorship, Partnership, Corporation, S Corporation, Limited Liability Company (LLC))
eBay Tax Preparation According to the IRS
Let’s say you’ve classified your eBay business eligible for paying business taxes. Or rather, you’ve received a 1099-K form from your Paypal account. Before you fill out any tax forms, prepare everything first. This includes knowing which business expenses to deduct, your business’ structure, your business tax credits, recordkeeping, and online seller tax laws and issues. The IRS provides a selection of tax rules for small businesses and the self-employed. Visit their website to learn more about filing tax payments for your eBay business. Owning a business gives you a huge advantage over being an employee. You may be able to deduct all kinds of expenses from the year from your total tax due. The more you can educate yourself about business taxes the more income you can squeeze out of your business.
Procedures for eBay Tax Filing
Filing for eBay tax often begins with receiving an email containing a Form 1099-K from Paypal. The form contains your business’ figures report provided by the payment processing company. Compare the report you’ve received with your personal records. If any of the figures don’t match, report it to Paypal to make sure it is correct. If you received large amount of payments (typically over $20,000 in Revenue) from other payment processors they may also send you a similar form. You will need to file the information on all 1099-K on your yearly tax return’s income section. Then, file it together with other tax documentations.
Your business’ structure plays a major role in filing your eBay tax. This is because taxes vary for online business structures. Take small businesses (partnership) and self-employed business owners (sole proprietorship) as examples. Small businesses are fined with taxes under the IRS’ list of liabilities for partnerships. This includes an annual return of income, excise taxes, and employment taxes. You can find the instructions and links to forms for filing partnership taxes here.
Self-employment taxes consist of Medicare and social security taxes. Filing and paying for self-employment taxes (Form 1040) is necessary if either:
- Your net earnings from self-employment are $400 or more
- If you work for a church or a qualified church-controlled organization and are paid $108.28 or more
For more information on self-employment taxes, visit the IRS’ webpage here.
Other Important Things to Consider
- Record Keeping
If you make a mistake on your taxes or your accountant does and you get audited, you will need copies of all your records in order to defend yourself. Take this step seriously as it makes yours and your auditor’s lives easier. Most people recommend keeping copies of your personal tax records for up to 7 years. Businesses should consider keeping them longer. The IRS recommends keeping records for the following reasons:
- Business progress monitoring
- Financial statement preparation
- Income source identification
- Deductible expense tracking
- Property basis tracking
- Tax return preparation
- Support for any items reported on tax returns
“What important records should I keep?”
Now that you’re aware of the importance of record keeping, determining which to keep is next. Every eBay business has different kinds of supporting documents they generate. These supporting documents can involve banks, couriers, stores, suppliers, and other related companies. It only matters that your supporting documents summarize your business’ transactions. Your supporting business documents are your cheat sheets for providing information in your books. So keep as much as possible. At a minimum, you must keep the following records:
The receipts you get from purchasing items you resell on eBay. It can also be the receipts you get from buying raw materials that you turn into finished products. Other examples of purchase documents include cash register receipts, invoices, canceled checks (identify the payee, proof of payment or electronic funds transferred, and its amount), and credit card receipts (or statements)
In its name, this includes any property, furniture, or machinery you own for the business. Asset documents must contain the following: when and how you acquired the assets, purchase price, cost of any improvements, Section 179 deduction taken, deductions taken for depreciation, casualty loss deduction (due to natural disasters), how you used the asset, when and how you disposed of the asset, selling price, and expenses of the sale. Asset documents that include this information are canceled checks (identify the payee, proof of payment or electronic funds transferred, and its amount). Purchase and sales invoices, and real estate closing statements.
- Gross receipts
Gross receipts are documents that prove your business’ income. This includes receipt books, invoices, cash register tapes, deposit information (cash and credit sales), and Forms 1099-MISC.
- Employment taxes
Employment taxes are documents that prove all that you’ve spent and received from hiring personnel. The IRS website has a section that discusses Recordkeeping for Employers in good detail.
- Travel, transportation, entertainment, and gift expenses
The IRS has created a publication that discusses which travel, transportation, entertainment, and gift expenses are deductible. You may find the publication here.
Should I Use Tax Automation Software?
Tax Automation is a good solution for eBay business owners who are too busy to track taxes. One of the most popular tax automation tools in the market today is QuickBooks. This software calculates payrolls, stores and organizes records, and generates sales and tax reports. It also gives out important updates on payroll and the latest U.S. tax code changes. QuickBooks can even fill out and print quarterly federal payroll reports (Form 941) anytime.
Try using a powerful eBay listing software that manages your listings, income and competition. No matter which tax automation method you use, choose one that records and keeps everything in one place.
State Sales Tax?
You should only pay for state sales tax if the state you live in requires you to. By law, different-state customers are exempt from paying sales tax. Every state in the U.S. has their own specific goods exempted from sales tax. Some exempt food, while some exempt garage sale items. It’s important to check with your state’s sales tax authority before charging this tax.
There is a fine line between purchasing items for resale and selling those items. When you use a seller’s permit to buy items to sell, you don’t need to pay for state sales tax. But if you sell those items, you need to collect state sales tax. Unregistered eBay businesses get away from paying state sales tax due to the lack of IRS records. If registered eBay businesses fail to pay this tax, paperwork and audits will always follow.
Instead of waiting for tax issues to arise, plan ahead and fill out the necessary tax paperwork today. Nobody wants the tax man knocking on their door but in the case that they do, you will be prepared.
Did our post give you a clear understanding of filing eBay taxes? If it did, please feel free to share your insights by commenting below. For more eBay business tips and tricks, please visit our blog today.
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