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:
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:
What taxes might I be liable for?
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.
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:
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:
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.
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.