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Calling all US sellers

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.

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2 Comments Add your comment
Great tips, thanks for sharing this important information. Reply
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You're welcome ebay selling tips! :) Reply
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