Calling all US sellers… have you been paying your taxes?

Hopefully it won’t come as news to you that when you are making money – whether it’s on eBay, on another auction site, or even at a flea market, you should be paying taxes. Too many sellers simply ignore the fact that they owe the IRS a percentage of their profits.

So to help prevent you from getting in trouble with Uncle Sam, I have put together this little guide to paying taxes in the US.

So, do I need to pay tax on my online income?

Yes. It’s really quite simple – If you sell anything on eBay and make a profit, you need to pay tax. Also remember that it is against the law to not report all income to the IRS.

To determine whether you have made a profit, calculate the total revenue from all of your sales for the tax year, and then subtract all expenses. Your expenses include the unit price you paid your supplier to acquire the items, PayPal fees, and eBay fees.

But it’s just a hobby business; I don’t have to pay any tax…

I have lost count of how many times I have heard this one! You can call it a hobby if you are genuinely selling without the intention of making money. One of the ways the IRS tests whether your business can be classified as a hobby business is by checking that you have made no profit in 2 of 5 consecutive years. The IRS has a list of eight questions you can ask yourself to help determine whether your business is a hobby one:

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
2. Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit. 
3. Do you depend on income from the activity? If so, your activity is likely to be considered a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business expertise to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

As you can see, the typical SaleHoo member who buys from suppliers, then resells them will not be classified as a hobby business. This is because you are buying goods with the intention of selling them to make a profit, and because the purpose of you selling is to make a profit.

Tip: The IRS highly recommends that you keep your business expenses separate from your personal ones. So if you haven’t already, now is a good time to set up a separate business bank account. Use this account to:

• Receive payments

• Transfer your PayPal payments into

• Pay your eBay fees

• Pay your supplier

What taxes might I be liable for?

Income Tax

This is tax on the income you make as a result of your business activity. All businesses must file an annual income tax return. The form you use depends on how your business is structured. Take a look at the IRS’s Business Structures guide to find out which returns you must file based on your business type.

Self-Employment Tax

If you are a sole proprietor then you will need to pay a self-employment tax of 15.3% once your earnings are over $400. To determine whether you are self-employed, and therefore liable for self-employment tax, the IRS uses the following criteria:

• You run a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself

Sales Tax

Sales tax is charged on all sales of physical goods to buyers within your state. Not all states charge sales tax (Delaware, Oregon, New Hampshire, Montana, Alaska and Hawaii). If you live in one of these states, then sales tax either does not apply or applies only in certain circumstances.

For all other sellers: sales tax applies to you! In general, you do not need to collect sales tax from buyers who live outside your state, just from ones who reside inside your state.

You can find your state’s sales tax rate by clicking here for a full list.  It is important that you check these rates out as there are significant variations between states. For instance, some states have one rate that applies state-wide, while in others, the rate varies between state counties and cities.

Use eBay to help collect sales tax

Did you know that you can use eBay to collect sales tax? It’s really easy. When you are setting up your item description, just select the sales tax option. By selecting the state where your business is located, you can ensure that proper tax is calculated for purchasers who also live in your state. Simple!

How to Setup Sales Tax on eBay:

1. Go to My eBay
2. Click the Preferences link from the left-hand navigation bar
3. Click Show in the Payments from Buyers section.
4. In the Use Sales Tax Table section click Edit.
5. The Sales Tax Table page appears.
6. Find the state you want to start charging sales tax in (the state where your business is operating) and put in the correct sales tax amount in the Sales Tax Rate field. You can also opt to charge sales tax on shipping and handling too if required.

You may also be liable for Payroll and Use taxes. Check out the IRS website for more information on these

How do I pay my taxes?

Many people are confused about how to go about paying their taxes – I know I was when I first started selling, but the truth is it’s pretty straight forward.

There are a couple of ways you can actually make your payment. As online retailers, you might find paying your taxes electronically the most convenient way. Click here to find out more about paying electronically.

You can also use EFTPS (Electronic Federal Tax Payment System) which is a service offered free by the Treasury to help businesses pay all their federal taxes electronically. This system is ideal as it processes payments on the same day and is simple to use.

Alternatively, you can pay by a money order or check made out to ‘United States Treasury’. Be sure to include your social security number on your payment.

For more information on tax and your online business, see our Business Setup section in the Learning and Training Center.

Disclaimer: This advice cannot replace that given by an accountant. We at SaleHoo are not tax professionals. This above information is to be considered as a guide only. We encourage all business owners, or future business owners to seek expert advice relating to all tax matters.

Things to sell on eBay: 3 Hot Niches for 2010!

Looking for some hot things to sell on eBay? Or maybe something to expand your product range this year?

Coming up with things to sell on eBay isn’t always easy: it takes time and persistence to come up with something that can compete with the thousands of other sellers on eBay. But don’t panic, I just came up with 3 fabulously profitable niches which can help your eBay business boom.

Zhu Zhu Pet Accessories

Breaking News! These are huge sellers on eBay. In fact, they are one of the most popular searches, coming just after iPhone in the top 10 ranks. Zhu Zhu Pets are adorable little robotic hamsters, with cute names like "Mr Squiggles" and "Pipsqueak". These have taken kids all over the world by storm and were a big hit under the Christmas tree last month.

The pets themselves sell well on eBay, but most sellers will have more luck selling accessories for the pets instead. Fans of Zhu Zhu’s can buy all sorts of frills to make their pets even more fun. Everything from bath time play sets to hamster wheels (hilarious!) and skateboards are becoming very popular.

These currently have a high success rate on eBay, but beware, as with all kids’ toys, something even more exciting is bound to come along sooner or later, so the time to act is now!

Sourcing these might be tricky, as they are still new, which means that arbitrage selling might be the best way.

I’m almost tempted to buy one myself!

Glow in the Dark Stair Treads

I’m so excited about these! Whoever takes my advice and gets into them will be one lucky seller. Glow in the dark stair treads are pretty new to the market, but totally innovative and useful, so marketing will be a big factor in selling these. You’ll need to really push the benefits of having these in the home.

Plenty of buyers will be interested in these: They can help people with young children who run up and down the stairs at night, or parents with teens who arrive home at ungodly hours of the night, and need the front steps illuminated.  Glow in the dark stair treads can also ease the minds of those with elderly parents who have trouble seeing at night. The treads will offer them a little help in seeing where to place their feet.

Right now, these are selling very well on eBay, and as I say, with the right marketing, this could be big.

Multi-Tier Wedding Cake Stands

Hosting a wedding is costly business, so brides (and their poor father’s who are paying!) are always looking for ways to cut costs, and thankfully, buying online is one of the first places they look.

Lots of cake decorators will rent out a cake stand with the cake, but this can cost mega bucks, and often it’s worth it just to buy one to keep forever, or resell when you are done with it. Hey, you never know, you might even end up selling a few to cake decorators themselves!

Either way, these could make a great little niche. The only down side being that when you sell glass or fragile stands, shipping could get costly for buyers.

PayPal’s New $20k 21 Day Hold Policy

Well, that’s it. Looks like I won’t be using PayPal anymore.

According to a letter to the editor of AuctionBytes, PayPal has a new policy in the pipeline which will allow them to hold payments received by account holders. This will affect all those who put less than $20,000 through their PayPal account in a 90 day period. And that includes me! These payments can be held for up to 21 days which would absolutely a lot of business out there.

For example, if I sold 50 items in a 21 day period, but did not receive the shipping money from my buyers due to PayPal holding it, I would have to pay over US$390 in shipping, out of my own pocket! I wouldn’t be able to sustain this for long, and my online business would surely crumble eventually. 

In the letter published by AuctionBytes, the author and fellow PayPal member called the support centre to enquire about holds on his accounts He was told about a memo that was circulated among support staff, which detailed the new policy. According to the customer service representative, the fact that he had over 1600 positive feedbacks and 4.8 or 4.9 on all seller ratings didn’t mean a thing. The new policy is interested in one number, and one number only, and that’s the number of $$’s going through your account. 

PayPal’s new policy is apparently based upon their quest to provide buyers with greater security. Their logic is: If the money is held for 21 days, the buyer has 21 days to dispute the transaction, and get a full refund. Although PayPal deny they will be making any interest off the money they would be holding, I find this very hard to believe. 

PayPal haven’t yet released any new information about the policy, which gives me some hope that this won’t go ahead. What we have found out though, is that last October, PayPal released some new information on their payment holds policy. We can confirm that according to their current policy on payment holds, the amount of money going through your account has no bearing on whether your funds will be held. Also, currently, the holding policy will be used at PayPal’s discretion, and will not affect everyone.

 Of course we will let you know about any new developments on this.

As a concluding remark, I will say that the lack of cash flow issues is one of things that makes online retail so great, and so easy to get started in. It’s one of the main reasons that so many people can successfully launch online retail businesses with little to no investment. With PayPal now threatening to put all that to an end, I think I will have to add "sign up to MoneyBookers/ProPay" to my to-do list this weekend.

If this new policy goes ahead, what affect will it have on your business? How would you cope with potential cash flow issues?

Get Set for More eBay Changes in 2010

According to our friends at eBay, every new year means new policies, and 2010 is no different! Last year, eBay brought us some big changes including those made to search results and how our listings will be ranked, compulsory shipping insurance and new PowerSeller requirements and benefits.

This year you can expect some changes related to eBay fees, Stores and the feedback system.

Fees

First things first; what are the fee changes? According to AuctionBytes.com, eBay may be looking at changing fees structure in 2010, due to the results of a comprehensive survey they conducted in 2009. The survey asked a number of questions, including whether they would sell more items on eBay if fees were lower. When eBay reduced insertion fees, and increased Final Value Fees, there were a lot of negative responses. Although eBay claimed it was better for sellers as they were only stung with high fees when their items sold, many sellers felt that eBay was using this as an excuse to mask yet another rise in selling fees.

If eBay takes the feedback from their survey seriously, we might finally see some fee changes that go in our favor!

Feedback

eBay has commenced testing its new feedback system that it plans to implement this year.  The new feedback system gets more information from the buyer about their experience in dealing with  them. The 5 new questions focus more on the service they receive such as shipping times and response to email enquiries, rather than the quality of the items bought.

Finally, buyers are asked how likely it is that they would recommend the seller to a colleague. Buyers can rate from 1 (Not At All Likely) to 10 (Extremely Likely).

Could this be detrimental to the feedback system? If a seller is presented with a long, complicated list of fields to fill out, will they actually take the time to do it, or simply leave it blank? If I’m right, this will be tough on new sellers who are trying to get past that crucial 100 feedback scores mark.

eBay Stores

eBay Store listings will appear in "core" search results, and will no longer be segregated from regular non Store listings. This means that new sellers who don’t yet have stores will find a whole new level of competition when buyers go searching for items which are also sold by Store owners. This means 2010 is a great time to think about setting up an eBay Store.

Oh yeah, and the fees on Stores are likely to rise also. Currently, Store listings cost between 3 – 10 cents for a 30-day listing, and the non-store 30-day BIN fixed-price format costs 35 cents, with final value fees varying, depending on the category.

Whatever the changes are on eBay this year, they are bound to be controversial. I guess when you have over 100 millions of users; it’s hard to keep everyone satisfied!

Keep an eye on our blog and we’ll keep you posted on all changes, as and when they occur.