Over the past decade, e-commerce companies have seen a spike in sales as more customers shift to buying products online. While this trend is great for sales and revenue, it means that business owners need to keep a closer eye on their accounting records due to tax obligations.
One of the most common forms of tax that e-commerce companies need to be aware of when selling on eBay is the income tax. Regardless of how much you make, all your profits will need to be reported and are subject to income tax.
Let’s dive a little deeper and see what income tax is and how you can prepare through the year for tax season.
This article has been prepared for informational purposes only and gives a general overview of income tax when selling on eBay. It’s not intended to provide any tax advice. It’s always best to consult with a tax professional to ensure that taxes are properly calculated and reported.
What type of taxes do I need to pay when selling on eBay?
There are different types of taxes that e-commerce business owners must be aware of. Selling on eBay incurs the following types of taxes:
- Income tax;
- Tax on eBay fees (depending on the country);
- Tax on items bought and sold on eBay.
In this article, we’ll concentrate on income tax only and how your online sales on eBay affect your income tax reporting.
What is income tax?
Income tax is a type of tax levied by governments on individuals and businesses based on their income or profits earned during a specific period, typically a tax year. In the United States, the federal government, as well as most state and some local governments, impose income taxes on individuals and businesses. The Internal Revenue Service (IRS) is responsible for administering federal income tax laws and collecting taxes.
Taxpayers are responsible for accurately reporting their income, deductions, and credits on their tax returns, and for paying any taxes owed. Income tax systems usually include tax credits, exemptions, and deductions that can help taxpayers reduce their tax liability, depending on their specific circumstances.
What forms of income are considered taxable?
Individual income tax applies to various forms of income such as:
- Wages, salaries, and tips;
- Interest and dividends;
- Business and self-employment income;
- Capital gains and losses from the sale of assets;
- Rental and royalty income;
- Retirement distributions, including pensions and annuities;
- Unemployment compensation;
- Social Security benefits (partially taxable in some cases);
- Other miscellaneous sources of income.
As you can see, money received through sales of items on eBay, depending on some factors, will mostly be classified as business and self-employment income, but not always. Let’s look at it closer.
Do you need to pay income tax on Internet sales from eBay?
In order to find out whether you need to pay income tax on your eBay sales, it’s always best to consult with a tax advisor. However, for educational purposes only, we’ll try to explain how selling on eBay can affect your income tax.
Generally, there are 3 categories that your eBay sales can fall into and affect how they affect your income tax and subsequent tax reporting.
Selling on eBay: occasional ‘yard or garage’ online sale
If you’re using eBay as you would an occasional yard or garage sale, usually the proceedings from those sales aren’t considered taxable income. One reason is that it happens occasionally. The second one is that with garage and yard sales, you’re selling used items for less than you bought them and probably even for less than their worth. Hence, it’s not done to make a profit but mostly to just clear up some space in your storage.
That’s why if you meet those criteria with your internet sales on eBay, they shouldn’t be considered taxable.
Selling on eBay: hobby vs business
Generally, there are two different designations for selling for a profit on eBay — hobby sales and business sales. The IRS uses some of the following criteria to help determine which of the groups an individual might fall under:
- The amount of annual sales transactions;
- Total gross sales from transactions;
- Dependency on this source of income:
- The number of hours spent selling on the platform.
The IRS has a more exhaustive list of conditions that it takes into account when determining whether sales should be classified as a hobby or as a business.
But the general idea is as follows: if you sell items on eBay often, and you don’t use it as a business but as just a hobby, then you’re entering a taxable category of online sales, and they need to be reported to the IRS. Going further, if you’re selling on eBay for a profit and using it as a business, you’ll be responsible for paying the appropriate tax and eBay will send you a 1099-K form.
So both hobby sales and business sales are taxable income, however different reporting applies when it comes to income tax.
Here’s a quick look at how eBay income tax affects both hobby and business sales.
Internet sales as a business: reporting your income from eBay sales
As a business selling on eBay, you have more luxuries than you do when classified as a hobby. For instance, you’re allowed to deduct your losses against your business income to reduce the amount of income you need to pay taxes on. Also, you’ll notice that you’ll receive a 1099-K form from eBay when you reach a reporting threshold.
Reporting requirements: If you’re considered a business, you are generally required to report your eBay sales as self-employment income on Schedule C (Form 1040). You’ll need to report both your gross income and deductible expenses to calculate your net profit or loss. You’ll receive a 1099-K form from PayPal or another payment processor, which must be reported to the IRS.
Deductions and expenses: If you’re running an eBay business, you can typically deduct business-related expenses, such as the cost of goods sold, shipping fees, eBay and PayPal fees, packaging materials, and other expenses. This can help lower your taxable income.
Self-employment tax: If your eBay sales are considered self-employment income, you may be required to pay self-employment tax, which consists of Social Security and Medicare taxes. This is in addition to your regular income tax.
State and local taxes: Depending on where you live and operate your eBay business, you may also be responsible for collecting, reporting, and paying sales tax on your sales. Be sure to check your state and local tax regulations to understand your responsibilities.
Changes to eBay income tax thresholds for 2023
The rules on reporting have changed recently, and as of January 1st, 2022, eBay and other marketplaces like Amazon now have to report online sales to the IRS. If you had gross sales of more than $20,000 and you’ve completed at least 200 transactions on the platform in the year 2022, then you’ll typically be classified as a business and eBay will send you the 1099-K form by the 31st of January 2023.
However, for the sales made in 2023, the IRS has lowered the reporting threshold to $600. In fact, the law was to be applied to the 2022 sales too but the IRS has issued a transition period for that year, so the lowered threshold will be applicable to the sales made from 2023 onwards.
Reporting eBay income on your annual tax documents
As we’ve shown, whether your eBay sales are seen by the IRS as a business or hobby, you need to pay your income tax.
When it’s time to file your taxes, you’ll want to ensure you have the appropriate forms and documents you need to fill everything out. Here are a few of the most common schedules and eBay tax documents you’ll need to complete your tax forms.
Hobby sales and tax forms
Should the IRS consider your eBay sales a hobby, you’ll report any income you make on Form 1040. It’s important to note that you can’t deduct any hobby expenses from your sales.
Form 1040 is the standard Internal Revenue Service (IRS) form that individual taxpayers in the United States use to file their annual income tax returns. The form is used to report various types of income, calculate the tax owed or refund due, and claim deductions and credits.
The 1040 form has several sections that taxpayers need to complete:
- Personal Information: This section includes basic information such as your name, address, Social Security Number, and filing status (single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child).
- Income: In this section, you report different types of income you received during the tax year, such as wages, salaries, tips, interest, dividends, business income, capital gains or losses, unemployment compensation, retirement distributions, and other types of income.
- Adjustments to Income: This part allows you to claim certain adjustments to your gross income, such as educator expenses, health savings account (HSA) deductions, or contributions to retirement accounts like an IRA. These adjustments help reduce your taxable income.
- Deductions: Here, you can claim either the standard deduction or itemized deductions, depending on which option is more beneficial for your tax situation. The standard deduction is a fixed amount that varies depending on your filing status. Itemized deductions include expenses such as mortgage interest, state and local taxes, charitable contributions, and medical expenses, among others.
- Tax Credits: Tax credits directly reduce the amount of tax you owe. Some common tax credits include the Child Tax Credit, Earned Income Tax Credit (EITC), and the American Opportunity Tax Credit for higher education expenses.
- Taxes and Payments: In this section, you calculate the total tax you owe, taking into account any tax credits and other payments (such as estimated tax payments or withholdings from your paychecks).
- Refund or Amount You Owe: Based on the information provided in the previous sections, you’ll determine if you are eligible for a refund or if you owe additional tax to the IRS.
There are also various schedules and additional forms that taxpayers may need to attach to their Form 1040, depending on their specific tax situations. These schedules can include Schedule A (Itemized Deductions), Schedule B (Interest and Ordinary Dividends), Schedule C (Profit or Loss from Business), Schedule D (Capital Gains and Losses), and others.
If you’re operating your e-commerce business as a sole proprietor, you’ll need to complete Schedule C on Form 1040. This portion of the document will help the IRS understand precisely how much income your online company made or lost within the last year.
Remember that tax laws and forms can change, so always refer to the latest version of the form and consult a tax professional for guidance specific to your situation.
Business sales and tax forms
Form 1099-K, also known as the Payment Card and Third Party Network Transactions form, is a tax document issued by payment settlement entities (such as credit card companies, online payment platforms, or third-party payment processors) to report certain payment transactions to the Internal Revenue Service (IRS).
This form is typically issued to individuals and businesses who receive payments through electronic transactions, including credit and debit card payments, or through third-party payment networks like PayPal or Stripe.
The purpose of Form 1099-K is to ensure that individuals and businesses report their income accurately, especially income from e-commerce. It helps the IRS track income earned through electronic transactions and verify that taxpayers are properly reporting their income on their tax returns.
Form 1099-K reports the gross amount of transactions processed, without any adjustments for fees, refunds, or other expenses. The form includes the following information:
- The payment settlement entity’s name, address, and taxpayer identification number (TIN);
- The payee’s (recipient of the payments) name, address, and TIN;
- The total gross amount of reportable payment transactions for the calendar year;
- The total number of payment transactions;
- A breakdown of the gross amount by month.
If you receive a Form 1099-K, you should report the income on your tax return, typically on Schedule C (Profit or Loss from Business) if you’re a sole proprietor or have a single-member LLC.
Does eBay report online sales to the IRS?
eBay has a responsibility to report your sales to the IRS when you cross over the threshold of sales. Moreover, both the federal threshold and state thresholds for reporting are reported and tracked by eBay. So if you don’t fall under the IRS threshold for annual sales, but you do according to your state regulations, eBay will report your sales and send you the 1099-K form.
Can eBay apply backup withholding?
In certain situations, eBay is required by the IRS to withhold 24% tax on payments eBay makes. Usually, that is due to failure to provide a valid TIN to eBay. To avoid that, sellers need to provide eBay with your full 9-digit TIN (SSN EIN, or ITIN). Here you’ll find a full list of conditions under which the IRS decides to apply backup withholding.
Once you receive the 1099-K form, you can check there the amounts for federal and state backup withholding in the appropriate sections.
To check backup withholding on any payments, see the ‘All Transactions’ page on your Seller Hub and open transaction details.
Simplify your e-commerce accounting with Synder when selling on eBay
As an e-commerce business owner, there are many things you have to worry about — inventory levels, pricing, or competition. The one thing you shouldn’t have to worry about is your accounting and bookkeeping.
Synder helps simplify your accounting by providing an automated process that imports all transactions from multiple sources such as major marketplaces, payment processors, and POS systems into your accounting software. You can sync each individual transaction or, if you have a large volume of sales, you can opt for a daily summary. This feature allows you to post a single journal entry per platform with all the important financial information, including taxes, neatly summarized.
The daily summary makes the job easier for your accountant but also helps you understand your sales as it also tracks profitability markers like COGS, inventory assets, or income by product/SKU.
Connect your sales channels in one source of truth and streamline managing eBay transactions – test Synder’s capabilities.
eBay sales and income tax: Closing thoughts
eBay sales do affect your income tax in the US if they’re considered taxable income. That’s why it’s important to maintain accurate records of your sales, expenses, and any other relevant information to ensure you comply with tax regulations.
Reliable accounting software can help you keep track of all your transactions, fees, discounts, or refunds as well as appropriate taxes. With accurate bookkeeping, the reconciliation process is clear and easy, which is important not only for your monthly operations but for the tax season too.
This article has been prepared for informational purposes only and gives a general overview of income tax selling on eBay. It’s not intended to provide any tax advice. It’s always best to consult with a tax professional to ensure that taxes are properly calculated and reported.