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 tax obligations.
One of the most common forms of tax that e-commerce companies need to be aware of when selling on eBay is 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 for tax season with the documents eBay provides.
What is income tax?
In its simplest form, income tax is a tax placed on an individual or business based on the income or profit they make in a year. Unlike other taxes such as sales tax, income tax doesn’t benefit from a pass-through tax where your buyer essentially pays the tax to you. Instead, you’ll need to pay the entire income tax out-of-pocket.
The good news is that you won’t need to worry about paying one lump sum at the end of the year for income tax. Instead, the IRS allows you to estimate the amount of tax you’ll owe annually and break it into quarterly payments.
Do you pay income tax on eBay sales?
As with many things in life, whether you pay income tax on eBay sales depends on several factors. For example, if you aren’t operating a business on the platform and only use eBay to get rid of old office furniture, you most likely won’t need to pay eBay income tax. However, if you’re selling on eBay for a profit, you’ll most likely be responsible for paying the appropriate tax.
Generally, there are two different designations for selling for a profit on eBay — hobby sales and business sales. The IRS uses 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
- The number of hours spent selling on the platform
If your e-commerce business has gross sales of more than $20,000 and you have completed at least 200 transactions on the platform, then you’ll typically be classified as a business.
Here’s a quick look at how eBay income tax affects both hobby and business sales.
Should the IRS consider your eBay business a hobby, you’ll need to approach your taxes a little differently. For example, you’ll report any income you make on Form 1040 instead of a Form 1099. It’s also important to note that you can’t deduct any hobby expenses from your 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 instead of the 1040 form.
Does eBay report online sales to the IRS?
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. While individuals with less than $600 in annual sales won’t have to worry about this, all other businesses will receive a Form 1099-K from the respective online platform.
Reporting eBay income on your annual taxes
Regardless of how much income you generate through eBay, you’ll still need to report it to the IRS. Depending on the amount of revenue you’re producing on the platform, you may have the option to provide estimated quarterly income tax payments instead of one payment at the end of the year.
It’s also important to note that you don’t want to start the filing process until you have all your tax documents. E-commerce companies selling on multiple platforms will receive multiple 1099 forms.
Important eBay tax documents for e-commerce cellers
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.
If you’re running an e-commerce company selling on platforms like eBay and Amazon, you can expect a 1099-K form if your annual sales surpass $600. The 1099-K will provide you with the amount of income you made throughout the year on the given platform. Remember that if you’re selling on multiple online sites, you’ll receive 1099-Ks from each.
Once you have the forms from all of the online sellers, you’ll be able to fill out the following form.
Every taxpayer in the United States will need to fill out a Form 1040 during tax season. As an eBay seller, you’ll use important eBay tax documents such as Form 1099-K to fill in your income and would need to complete Schedule C if you’re also a sole proprietor.
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.
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