Anyone who is self-employed has to pay income and self-employment taxes, and eBay sellers are no exception. No matter how much you make from your eBay business, it is subject to taxes as far as the IRS is concerned. It is important to understand the types of taxes that eBayers must pay, and how to minimize the amount of taxes you are responsible for.
Income Tax Considerations
If you have sold items at a profit on eBay, you are responsible for paying income tax on the amount of profit you make. The key here is profit. If you have sold nothing but items you've found around the house and need to get rid of, you have likely sold them at a loss just to get them out of the way. In that case, you would not have to pay income tax on your eBay earnings. But if you buy items from suppliers, stores, or even garage sales, and make a profit on them, you will have income tax liability.
One of the tax advantages of running a small business is that you can take advantage of several deductions. These reduce your taxable income, hence reducing the amount of income tax you owe. For an eBay business, you might be eligible for some of the following deductions:
* Mileage (for trips to the post office)
* Shipping costs
* Purchase prices of products bought for resale
* A portion of your phone bill
* Home office equipment and expenses
* Computer and software
It is important to talk to your tax advisor about your deductions. Some may be limited or not qualify due to use for other purposes. And there may be others that you qualify for as well.
Sales and Use Tax and Payroll Tax
eBay sellers may also be responsible for collecting sales tax from buyers who are in their state. Buyers from other states are responsible for paying use tax in their own states. Also, if you purchase items from another state that would be subject to sales tax had you purchased them in your home state, you will be responsible for paying use tax. You can avoid paying use tax on items you buy to resell by getting a reseller's license.
If you hire employees to help with your eBay business, you will be responsible for payroll taxes. And if you set your business up as an S or C corporation, you will have to pay payroll taxes on your own income as well. If you are a sole proprietor, self-employment tax takes the place of payroll tax.
It pays to be prepared when it comes to taxes. Knowing what taxes you may be subject to in your eBay business can make things much easier on you when it comes time to file. If you are unsure, go ahead and talk to your tax advisor before the end of the year. Doing so may help you avoid unpleasant surprises.