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Income Tax and Your eBay / Amazon Business
Self Employment Tax & Income Tax For Your Online Business, Tips on How To Handle It
Income tax is the topic of this Tracy’s Tuesday’s Tips.
For small business and online ecommerce sellers. Consider the rule of 1/3’s. Buy an item for $10 and sell for $30. $10 cost of goods sold, $10 of Amazon seller fees and shipping to Amazon, leaves $10 profit. This is a generic example of what to go by when considering products for resale.
Here are the tips I have for online resellers when it comes to income tax and how to handle it.
- 1st tip, get a really good CPA. A good CPA should save you money even though it will cost you money, however he/she will know tax loopholes and will save you more money than what it will cost. Make sure your CPA understands ecommerce sales. It is a relatively new field but they should understand all the online considerations for your online business.
- Everyone legally has to pay income taxes on your sales. If you don’t pay taxes on your profits earned then you could have legal consequences that could lead you to sitting in jail, and we don’t want that to happen. If you are making less than $600 selling your used items at a loss might be an exception. For example if you bought a new bike and used it for a few years then decide to sell it on Craigslist but you sell it for a fraction of what you originally paid for it then you are at a loss. You didn’t originally buy the bike and intend to resale it for a profit. If you are doing activities that is intended to make a profit you will need to pay income taxes.
- Ebay’s Paypal will send you a 1099 form for the amount of sales you made if you have sold $20,000+ and 200+ transaction, at the time of this writing. Paypal will send the 1099 business tax form to the IRS that lets them know that you are an online business selling products through their channel. You will then need to make sure that you report on your taxes that you received that 1099 form so the IRS will line it up with what they received from Paypal.
- You owe only on profit AFTER expenses. Online business expenses includes, cost of products for resale, fees, banking fees, seller fees, packing and office supplies, cell phone, scanning apps, anything that you would use to help you in your business.
- If you have a LLC or corporation then definitely hire a CPA for the taxes. If you are a sole proprietor then you would submit your business income and expenses on a schedule C of your personal taxes.
- Don’t be surprised by the self-employment tax. You are responsible of paying 15% self-employment tax since you are your own boss. If you are employed by a company, you would normally pay 7.5% and your employer would pay the other 7.5%. Since you are essentially employing yourself then you have to pay both sides for the Self Employment Tax.
- Real life example: I find an antique lamp at a garage sale. I sell that lamp and make a $200 profit. I get to deduct all the fees accociated with that item, selling fees, gas to get it, cell phone service etc… You can also take the items you sold at a loss as part of your deductions. If you sell on Amazon FBA and have products shipped back to you because they are not sellable or were damaged, customer returned etc., you get to write that off as a deduction since it’s not sellable and you paid money for that inventory that is now at a loss.
- You need to keep really good records. People ask me what types of products or services I use to keep everything organized. I personally use Godaddy Bookkeeping. It’s good and inexpensive at around $9 per month. You can enter in all of your ecommerce sites like Amazon and Ebay and it keeps track of sales, how much is in your accounts. Godaddy Bookkeeping stays up to date automatically when keeping track of your sales on the Amazon and Ebay sites. You can also organize all of your business expenses in Godaddy Bookkeeping and take pictures of receipts and upload to the program. You can even keep track of the mileage you drive to go find the product you are selling such as retail arbitrage and garage sales. There are reports you can run on Godaddy Bookkeeping along with it organizes all the income and business expenses to the schedule C for tax time.
Here is an article from Godaddy that I mentioned in the video……
https://www.godaddy.com/garage/smallbusiness/manage/get-free-small-business-tax-guide/
These are my tips for handling income taxes for your online business. Always consult with your CPA for best practices on handling your online sales income. I hope you found some useful information and will hopefully save you from some headaches in the future when dealing with self employment tax.
Feel free to comment below with your tips or questions.
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