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The Basics of Taxes for Online Sellers

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Thanks to COVID-19, online shopping is more popular than ever. And if you’re a seller on eBay, Amazon, or another online retail platform, you’re reaping the benefits. Just remember that while you’re raking in all that online cash, you’ll need to pay taxes, too!

Who Needs to Pay?

Beginning in 2022, online businesses such as Amazon are required to file 1099-K forms for those who earn more than $600. Previously, the threshold was more than $20,000 in gross sales or 200+ transactions in a calendar year. The new, lower threshold means that many more people will be on the IRS’s radar.

If you’re selling stuff online, especially on a consistent basis, it’s likely that the IRS will know about it. This doesn’t necessarily mean, however, that you’ll owe taxes. Generally speaking, if you’re selling to make a profit and have net earnings of more than $400, you’ll need to report it as self-employment income and pay self-employment taxes of 15.3 percent. The good news is that as a business, you’ll also be able to deduct any expenses and claim losses (Schedule C, Profit or Loss from Business), which can substantially lower your tax liability.

If your online sales are more of a hobby, you’ll still have to include the income of your Form 1040, but you won’t have to pay self-employment taxes. The downside is that you can’t take a loss if your expenses outweigh the income you’ve earned.

Sales Taxes for Online Sellers

As a self-employed business owner, you will also need to pay sales tax. Especially when you sell in multiple states, you are responsible for collecting and remitting sales tax in each state where you have a nexus. And the complex rules of each state can be wildly confusing. As a hobbyist, it’s likely that you won’t have to collect sales tax, but it’s important to check the rules for your local area.

To ensure you’re not making unnecessary payments or unknowingly neglecting your sales tax responsibilities, it’s strongly recommended that you consult with a tax professional.

Paying Estimated Taxes Quarterly

If you haven’t been paying taxes on your online income, you may pay estimated taxes quarterly to avoid IRS penalties and collection actions for non-payment of taxes. If you think that you’ll owe more than $1,000 in taxes in a year, the IRS prefers that you pay your taxes every quarter. The deadline for making quarterly payments are as follows: April 15, June 15, September 15, and January 15. If the deadline date falls on a weekend or holiday, however, it is pushed to the next business day.

To pay your estimated taxes quarterly, you may electronically file and pay your taxes through the Electronic Federal Tax Payment System (EFTPS), or fill Form 1040-ES and mail it to the IRS. You may also pay taxes over the phone.

If you have any questions about taxes for online sellers, contact one of our tax professionals who can help you optimize and save on taxes throughout the year.