eBay Tax Tips
eBay Sellers - Learn How to Save Money on Your Small Business Taxes!
Hey eBay sellers! Now that you're making a profit on eBay, you're probably wondering...
1. Do I have to report my eBay income?
2. What expenses can I deduct?
3. How can I minimize the taxes I pay on my eBay income?
If you want to learn how to minimize your taxes and keep more of your eBay profits, this is the place to be!
As a CPA and an eBay seller, I specialize in offering tax planning and advice to eBay sellers and other online business owners.
For even more tips, tools and articles on eBay and taxes, please visit the eBiz Tax Tips blog.
Are You Ready for the New 1099 Rules?
Starting in 2011, credit card merchants - including eBay, PayPal and Amazon among others - will have to start sending out 1099 forms to sellers who meet certain criteria. If you earn money online, whether it's selling items on eBay, selling your own product, or selling affiliate products, you may get a 1099 next year.
This bill has been years in the making; the original bill proposed that credit card processors be required to file 1099s for each seller that had at least $10,000 in gross sales and 200 transactions. The numbers in the final bill are a bit different - you must have at least $20,000 in gross sales and 200 transactions before credit card merchants are required to send you a 1099, so less people will be affected than originally thought.
1099 Reporting Deadline Approaching Quickly...
Did you hire an eBay assistant, or a graphic designer, or virtual assistant to help in your business this year? If so, you may need to file a 1099 for that person. IRS Form 1099 is used to report various income sources, such as income earned by independent contractors. As an eBay business owner, you could get a 1099 from another person if you provided them services, or you may need to provide a 1099 to another person if they provided services to you.
The 1099 deadline is January 31st. You must provide copies of form 1099 to each recipient who meets the requirements, as well as copies to the IRS. To learn more, please visit Reporting 1099 Income.
The Ultimate eBay Spreadsheet!
If you've been looking for an easy way to keep track of your eBay sales and fees, then you've found it!
Easy Auctions Tracker is the Ultimate Excel spreadsheet solution for eBay sellers and Trading Assistants. This spreadsheet doesn't calculate your fees, it actually COLLECTS your transaction information from your eBay account for you!
Easy Auctions Tracker is fully automated and has been Tested & Certified by eBay as a compatible application. By using this spreadsheet, you will be able to quickly collect and record your transactions (sold items and unsold items) without the need to manually enter the information.
With the simple click of a button, Easy Auctions Tracker is able to collect all the information for an entire month's worth of sales from eBay's servers for you. No need to know the item numbers of the sold items, just select the month & year then click the "Get All Items" button.
As an accountant and tax professional who works with eBay sellers, I can say that this spreadsheet will make your bookkeeping and thus your tax preparer's job much easier! Which will mean less time and lower fees for you.
I was excited to find this worksheet and recommend it for eBay sellers who want to track their sales and associated fees in a spreadsheet, but don't want to spend hours entering the information manually.
Ebay and PayPal Must Report to the IRS
Buried deep in the housing act that was just passed is a provision that requires credit card processors - including companies like eBay and PayPal - to report annual gross receipts of it's merchants to the IRS.
Credit card processors will be required to file Form 1099 for each merchant that has at least $10,000 in gross sales and 200 transactions.
Companies have until 2011 to comply with this new law.
The purpose of this new law is to raise revenue for the housing recovery package and to close the tax gap that exists. The IRS estimates that it loses billions of dollars in tax revenue from small businesses who under-report (or don't report) income.
While I'm worried that this new law will cause the cost of business for small and online business owners to go up (in the form of higher eBay fees, higher PayPal fees, etc.), I also think that all small business owners should pay their fair share of taxes (I pay my taxes, why shouldn't all small business owners?).
eBay & Taxes
What's Your Biggest Question About eBay & Taxes?
Q&A: Do I Have to Pay Tax on Personal Items Sold on Ebay?
Q: I started selling items from around my home that I don't want anymore on eBay. I am selling BELOW what I paid for these items. I'm not trying to make a profit, I'm just trying to get rid of items no longer wanted. Is this considered a business? Do I have to report my eBay sales to the IRS?
A: Selling personal items at a loss is not a business activity, so you don't have to worry about keeping track of or reporting this activity on your tax return.
The IRS will not allow you to claim a loss for personal items sold on eBay. However, the minute you purchase something with the intent of selling on ebay for a profit, you've got a business, and then you DO need to start keeping track of and reporting your activity.
Note: if you sell both personal items and items that you bought specifically to resell, then you should report the personal items sold as well, but use the sales price as the cost so you don't show a loss for these items. Or, you could setup a separate eBay account and use one for personal use, the other for business use - that's probably the best solution.
Reporting 1099 Income
If you do affiliate marketing, internet marketing, or work as an independent contractor, then instead of a W-2, you will receive a Form 1099-MISC reporting your earnings.
However the company is not required to file this report unless you receive $600 or more in income. Also, currently eBay does not give out 1099 forms, so if your income is strictly from eBay, you won't receive a Form 1099.
The good news is that as an internet marketer or an independent contractor you get to deduct expenses against this income, assuming the expenses are necessary to run your business.
Report your income from your 1099 and any associated expenses on either Schedule C-EZ or Schedule C. This schedule is then attached to your Form 1040.
Q&A: Do I Need to Collect Sales Tax?
Q: Do I collect sales tax on all my sales or just those I sell in my home state? And does this tax money get claimed as income and then expensed as a deduction?
A: This is a great question and one that I get often!
Currently, online business owners and eBay sellers are not required to collect sales taxes on items that are sold and shipped to customers in another state. If the state the eBay seller or business is located in has a state or local sales tax, then you are supposed to collect sales tax on items sold and delivered to the same state, but you do not have to collect sales taxes on sales to customers located in another state.
Sales tax collected is not income, and sales tax remitted to the state is not an expense. So for tax purposes, you should not claim the sales tax you collect as income, and likewise, you should not deduct sales taxes remitted to the state as a deduction.
Top 5 Missed Business Tax Deductions
I spoke about tax tips for small business owners at a seminar this past weekend, and one of the questions I got was 'what are the top missed business deductions?'
This is a great question, so here goes...
1. Automobile expenses - if you use your car for business, you can deduct a portion of your car expenses. You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (55 cents per mile in 2009).
2. Startup expenses - business expenses incurred before you actually start the business used to have to be depreciated over 5 years. Starting after October 22, 2004, you can now deduct up to $5,000 of startup expenses in the first year of business. Startup expenses over $5,000 still have to be depreciated (over 15 years). Startup expenses include advertising, hiring employees, purchasing equipment, supplies and more.
3. Education expenses - you can deduct the cost of classes, seminars and other education costs if they are related to your current business.
4. Travel - when you travel for business, you can deduct the cost of the airfare, taxis, hotel, meals, and other travel related expenses. If part of your trip is for personal reasons, you may need to prorate part of the expenses. Also, if you bring your family along, only your own expenses are deductible.
5. Home office expense - many people choose not to take this deduction because it is considered a red flag. If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn't not go into business because someone says you're more likely to get audited as a small business owner, would you?). Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm. You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.
eBay, Dropshipping and Sales Tax
Many eBay sellers use dropshippers to sell/deliver products. A reader recently asked if she was required to collect sales taxes on items shipped to the same state her dropshipper is located in, if she does not live and operate her business in that same state.
For example, lets say your dropshipper is located in Texas, but you live and operate your business in Florida. A customer in Texas purchases an item and it is delivered to Texas from the dropshipper in Texas. Do you need to collect Texas sales tax on this transaction?
This is a gray area, and I wouldn't be surprised to see it change in the future. But for now, you pay sales tax on items that you ship to the state where your primary business is located. So if you live and operate your business in Florida, you only pay sales tax when you ship items to customers in Florida.
Your dropshipper in Texas may try to charge you sales tax for orders that are placed in/shipped to Texas because their warehouse is located in Texas (and therefore they are subject to Texas sales tax laws). To avoid this, you should get a resellers certificate and supply it to your dropshipper.
However, every state has different sales tax laws, so for additional information you should contact your state's department of revenue.
Is Your eBay Income Taxable?
If you sell items on eBay for a profit, then you may owe income taxes on those profits. It doesn't matter if you sell on eBay as a hobby or if you are trying to build a profitable eBay business.
Generally, any income you receive from all sources is subject to income tax unless it is specifically exempt by law (hint: profits from an eBay business are not exempt).
You must file a tax return if your net earnings from self employment are $400 or more. You are self employed if you carry on a trade or business for profit. If you sell on eBay, you are generally trying to make a profit, and you therefore have a business.
To report your eBay earnings on your tax return, file Form 1040, and attach Schedule C or C-EZ. Schedule C is used to calculate your net profit or loss from your business, which is then reported on your Form 1040.
Top 10 Tax Deductions for eBay Sellers
Many eBay sellers ask me, "what expenses can I deduct against my eBay income?"
Because eBay sellers pay income tax and self employment tax on their eBay profits, it's important to get all the tax deductions you are entitled to.
Here are the top 10 income tax deductions for eBay businesses:
1. Inventory or product purchased for resale
2. eBay fees
3. PayPal fees
4. Postage and delivery
6. Bad debts (for those non-paying bidders)
8. Mileage (trips to the office supply store, post office, etc.)
9. Telephone (cell phone, second line, fax)
10. Bank charges
San Diego Man Sentenced for Failing to Pay Taxes on eBay Sales
If you haven't been reporting and paying taxes on your eBay sales, now might be a good time to start. As you can see by the following article, the IRS is serious about cracking down on taxpayers who make money online but don't pay taxes on their eBay or other online income.
SAN DIEGO - A former San Diego police officer who failed to pay taxes on money he made by selling stolen property on eBay was sentenced today to 21 months of home confinement and was ordered to pay $220,000 in restitution.
James Estrella, 48, pleaded guilty a year ago to federal income tax evasion charges. At the time, he was on probation after pleading guilty in state court on Dec. 2, 2004, to four felony counts of receiving stolen property.
U.S. District Judge Roger Benitez said he could have put Estrella in prison, but it was more important for the defendant to pay back what he owed to the Internal Revenue Service.
Do You Need a Tax ID Number for Your eBay Business?
EBay sellers who are sole proprietors are not necessarily required to get a tax identification number, but it may be a good idea to have one.
A tax identification number or an EIN (employer identification number) is a nine-digit number that is assigned by the IRS to businesses to be used when filing tax returns, hiring employees, and for setting up qualified retirement plans. Many banks require an EIN to apply for a loan or to setup a business bank account as well.
You can get your EIN by completing IRS Form SS-4, Application for Employer Identification Number, which is available at the IRS website (www.irs.gov). You should also check with your state to see if you are required to get a state ID number.
IRS Circular 230
Disclaimer: Any tax advice contained in this message is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. It is strongly recommended that you get additional help from a (paid) tax professional who is familiar with your unique circumstances. In other words, don't take take advice from a Squidoo lens, or forum, or blog...