Even if you are not running a business and only selling personal items, there are tax ramifications when selling on eBay. You should educate yourself on eBay tax issues to avoid unpleasant tax surprises from the IRS. This section goes over your income and sales tax obligations as an eBay seller. Even if you understand the issues today, there is new proposed legislation that can change everything.
The current tax laws do not require eBay or PayPal to report the sales proceeds to the Internal Revenue Service. However, in an effort to capture unreported income, the IRS is considering a proposal to classify eBay as a “broker” and require eBay to report all sales to the IRS. The logistics of doing this would be an incredibly daunting task for eBay. Sellers would need to provide eBay with a social security or federal tax ID number and report their profits to the IRS. This paperwork nightmare would likely drive many sellers away from eBay. A positive benefit is eBay seller fraud may be drastically reduced as sellers will need to verify their identity before they are allowed to sell. See internet broker tax for more information.
Currently, eBay does not provide sales tax information to any state. A 1992 Supreme court ruling declared that forcing sellers to collect sales tax in states where they don’t have a physical presence constitutes an undue burden. Imagine trying to collect sales tax for potentially 50 different states. Each state has a different sales tax rate and counties and cities within the state can have its own tax rate added in on top. It will quickly turn into a paperwork nightmare trying to keep track of it all. States are not sitting idly by watching all that sales tax revenue go untapped. In an effort to by-pass the Supreme Court ruling, several states have proposed the Streamlined Sales Tax Project. If this legislation takes hold, it will require eBay sellers to collect sales tax and pay them to each state. See eBay sales tax for more information.
Many new eBay sellers wonder if they need to pay taxes on the items they sell. The answer is yes, but only if there is a profit on the sale. Since most used items sell for less than what they cost when they were bought new, there is no profit on the sale. If there are no profits, then there is no need to pay taxes on the sale.
If you do end up with a profit on your eBay sale, you are required to report the proceeds to the IRS. Since neither eBay nor PayPal report sales transactions to the IRS, you are on the honor system to report your eBay profits. Consider creating a business to take advantage of deductions relating to your eBay sales. This will help reduce the amount of tax you will have to pay to the IRS. See the section Create a Business for Tax Purposes below for more details. Even if you don’t set up a business, you can deduct the eBay and PayPal fees from the proceeds of your sales.
Sales tax should be collected on your eBay sales if the state you live in charges a sales tax. You need to collect sales tax only from buyers that reside in the same state. You do not have to collect sales tax from buyers that live in other states. Each state has its own set of goods that are exempt from sales tax. For example, there is no sales tax on food. Some states also exempt certain types of sales transactions such as garage sales. Be sure to check with your state’s sales tax authority for more information.
When you purchase items for resale using a seller’s permit, you don’t pay sales tax on that purchase. However, when you sell the items, you need to collect sales tax. Depending on your sales volume, the collected sales tax must be paid to your state’s sales tax authority on a bi-weekly, monthly, or quarterly basis.
The question that often comes up is how will the state know about the sale if eBay does not report them? The answer is they won’t know. If you are running a business, then there is likey to be a nice paper trail to follow if the state decides to audit you. For individuals, the state will probably never know. You are on your honor system to collect the sales tax and file the necessary paperwork. Of course, most people don’t.
If you are going to pay taxes on your eBay profits, you should create a business so you can deduct expenses related to your eBay sales. Items that sell for a loss can be deducted from your profits. You may qualify for a home business deduction if you use part of your home exclusively for your eBay business. The camera used for photography, mileage driven to find products to sell, shipping supplies, internet access, and many other things are legitimate business expenses. Be sure to keep accurate records. At a minimum, you should use a spreadsheet to keep track of your business expenses. As your business grows, you should switch to professional accounting software such as Quickbooks.
Don’t go crazy with the deductions thinking this is a perfect tax shelter. If you don’t show a reasonable profit after a few years, the IRS could classify your business as a hobby and disallow all the business deductions you have taken. You will then be required to pay back taxes on those disallowed deductions.
For most people, setting up your business as a sole proprietorship is the best choice. Any income from the business will be treated as ordinary income on your tax return. Sole proprietors use Schedule C to file their taxes. Unfortunately, the income is subject to self employment tax. Tax preparation software can walk you through Schedule C and automatically calculate any self employment tax due.
For more information about Schedule C, see Tax Guide For Small Business, IRS Publication 334.
Most counties and some cities require a business license in order to do business in their jurisdiction. You will then be assessed a business tax once a year. The tax is based on the value of your business property, or a percentage of your gross receipts depending on the jurisdiction. For a small business, the tax is usually less than $150. Check your county/city government website for more information.
When your business grows to a point where you need to hire employees, you have to deal with payroll taxes. Employers must pay half of the employee’s social security and Medicare tax. The employee pays the other half. The employer is also required to withhold the employee’s federal, state, and in some cases, city income tax. Employers must contribute to federal and state unemployment funds. Depending on your payroll size, the funds collected must be deposited with state and federal agencies on a bi-weekly, monthly, or quarterly basis.
To help with the paperwork, there are several payroll services that will manage your payroll for a fee. Quickbooks sells an add-on payroll module that will handle all the calculations and generate the forms to file with the IRS. Each state has its own set of rules. Check your state’s government website for more details.
See Employer’s Tax Guide, IRS Publication 15 for more information about payroll taxes.
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