How to Pay Taxes for US Online eCommerce Sellers

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, 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. To help prevent you from getting in trouble with Uncle Sam, I've put together this comprehensive guide to paying taxes in the US.

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 your sales for the tax year, and then subtract all operating expenses. Your operating expenses include the unit price you paid your supplier to acquire the items, PayPal fees, and eBay fees.

Hobby vs. Business: Understanding Your Status

A common misconception is that if you treat your selling activity as a hobby, you don't have to pay taxes. However, the IRS has specific criteria to determine whether your activity is a hobby or a business.

The IRS uses a list of eight questions to help determine whether your business is a hobby:

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
2. Do you participate in your activity just for fun? Hobbies—also called not-for-profit activities—are those activities that are not pursued for profit.
3. Do you depend on income from the activity? If so, your activity is likely to be considered a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun often don't have the business expertise to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year—or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses.
7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

As you can see, the typical SaleHoo member who buys from suppliers and 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.

Record Keeping

Maintaining accurate records is crucial for your business. The IRS recommends keeping records of all income and expenses, including receipts, invoices, and bank statements. Good record-keeping will help you accurately report your income and expenses and can be crucial if you are ever audited.

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What Taxes Might I Be Liable For?

Understanding the different types of taxes you might be liable for is crucial for managing your online business effectively. Here’s a breakdown of the primary taxes you need to consider:

Income Tax

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.

Business Structures and Income Tax Forms

The type of business structure you choose will affect the form you need to file:

• Sole Proprietorship: File Form 1040, Schedule C (Profit or Loss from Business).
• Partnership: File Form 1065 (U.S. Return of Partnership Income).
• Corporation: File Form 1120 (U.S. Corporation Income Tax Return).
• S Corporation: File Form 1120S (U.S. Income Tax Return for an S Corporation).

Each of these forms requires detailed information about your business income and expenses, so be sure to keep thorough records throughout the year.

Self-Employment Tax

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:

• You run a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself.

Calculating Self-Employment Tax

Self-employment tax consists of Social Security and Medicare taxes. The current self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. You can use Schedule SE (Form 1040) to calculate your self-employment tax.

Sales Tax

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.

Understanding State Sales Tax Rates

Sales tax rates vary by state and sometimes even by city or county within a state. It’s important to understand the specific requirements in your state to ensure compliance. You can find your state's sales tax rate by visiting the relevant state government website.

Using 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 eBay sales tax is calculated for purchasers who also live in your state. Simple!

How to Setup Sales Tax on eBay:

1. Go to My eBay
2. Click the Preferences link from the left-hand navigation bar
3. Click Show in the Payments from Buyers section.
4. In the Use Sales Tax Table section, click Edit.
5. The Sales Tax Table page appears.
6. Find the state you want to start charging sales tax in (the state where your business is operating) and put in the correct sales tax amount in the Sales Tax Rate field. You can also opt to charge sales tax on shipping and handling too if required.

Other Taxes

In addition to the taxes mentioned above, you may also be liable for Payroll and Use taxes. Check out the IRS website for more information on these.

Payroll Taxes

If you have employees, you will need to withhold payroll taxes from their wages. Payroll taxes include Social Security and Medicare taxes, as well as federal and state income taxes. Employers are responsible for paying the employer’s portion of these taxes and for depositing the taxes with the IRS.

Use Tax

Use tax applies to the use of goods or services when sales tax has not been paid. This often comes into play when you purchase goods from out-of-state vendors who do not charge sales tax. If you use these goods in your business, you may be required to pay use tax.

How Do I Pay My Taxes?

Many people are confused about how to go about paying their taxes—this was a concern I had when I first started selling. However, the truth is it's pretty straightforward.

Electronic Payments

As online retailers, you might find paying your taxes electronically the most convenient way. The IRS provides several options for electronic payment, including:

• Direct Pay: Allows you to pay your tax bill or estimated tax payment directly from your checking or savings account.
• Electronic Federal Tax Payment System (EFTPS): 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.
• Credit or Debit Card Payments: You can use a credit or debit card to pay your taxes online, by phone, or using a mobile device.

Paying by Check or Money Order

If you prefer, you can also pay by a money order or check made out to ‘United States Treasury’. Be sure to include your social security number or employer identification number (EIN) on your payment to ensure it is properly credited to your account.

Quarterly Estimated Taxes

If you expect to owe $1,000 or more in taxes when you file your return, you may need to make estimated tax payments. Estimated taxes are paid quarterly to the IRS and are used to cover income, self-employment, and other taxes. Use Form 1040-ES to calculate and pay your estimated taxes.

State Tax Payments

In addition to federal taxes, you may also need to pay state taxes. Each state has its own procedures for paying state income tax, so be sure to check with your state’s department of revenue or taxation for specific instructions.

Filing Deadlines

It’s crucial to be aware of the filing deadlines for your federal and state tax returns. Missing a deadline can result in penalties and interest charges. The due date for most individual tax returns is April 15, but if that date falls on a weekend or holiday, the due date may be extended to the next business day.

Seeking Professional Help

Navigating the complexities of tax laws can be challenging, especially for new business owners. Consider consulting with a tax professional or accountant who can provide expert advice tailored to your specific situation. They can help you ensure compliance, maximize deductions, and minimize your tax liability.

Conclusion

Paying taxes as a US online seller might seem daunting, but with the right information and tools, it can be a manageable part of your business operations. By understanding your tax obligations and keeping accurate records, you can ensure compliance and avoid potential issues with the IRS. Remember, paying your taxes is not only a legal requirement but also a crucial step in running a successful and trustworthy business.

Additional Resources

For further guidance and tools to help you manage your online business, consider exploring the following:

• SaleHoo's Learning Academy 
• IRS Business Structures Guide
• EFTPS: Electronic Federal Tax Payment System
• IRS Self-Employment Tax Information
• State Sales Tax Rates
• eBay Sales Tax Setup Guide

By following these guidelines and utilizing the resources available, you can focus on growing your eCommerce business with confidence and peace of mind.

This comprehensive guide ensures that you, as a US online seller, have a clear understanding of your tax obligations and the steps you need to take to stay compliant. With SaleHoo’s support and the right knowledge, managing your taxes can become a straightforward aspect of your business, allowing you to concentrate on what you do best—selling and growing your online store.

Disclaimer

This advice cannot replace that given by an accountant. We at SaleHoo are not tax professionals. This 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.