The Top 10 Tax Tips For eBay Business Owners
Taxes for eBay Business Owners
Almost everything can be found on eBay, thanks to the platform’s wide variety of online sellers. The platform has a growing user base of about 187 million people worldwide in the 1st quarter of 2021. This is approximately 7.47 per cent larger than last year’s, making it one of the world’s most active eCommerce sites.
With that in mind, many sellers have been looking into improving the efficiency of their online retail stores. Although sellers can find different ways of improving their marketability on eBay, they also have to deal with the taxes that come along with it. All sellers on eBay’s platform are responsible for complying with the tax laws applicable to them.
However, there are ways to try and reduce the impact of these taxes on your bottom line. We’ve put together a list of tax tips that aim to help you deal with the issue of taxes.
1. Find out whether your state imposes Sales Tax
Firstly, online sellers must know what taxes they may need to collect and remit; for sellers based within the United States, Sales and Income Taxes are required state-by-state. Luckily, tax regulations across the US are easily accessible online, so researching them should not be too hard.
Although the US has no national sales tax rate, it is imposed at a state level. The only places in the US that don’t collect sales tax would be Delaware, Montana, New Hampshire, and Oregon. Everywhere else has some form of sales tax regulation in place. Not only that, it’s possible that these states have authorized their local governments to collect a local option sales tax.
2. Figure out your Income Tax situation
Income Tax is also something that sellers need to be aware of. For online sellers, this is measured by the number of sales or transactions within a calendar year. However, it should be noted that not all transactions done on eBay are subject to this tax.
If you only use eBay to sell items occasionally, you won’t hit the threshold required for reporting income tax. You’ll also be exempt from income tax if you sell an item for less than you bought.
In previous years, the threshold before eBay would send sellers a 1099-K was a sales revenue of $20,000 or greater. It could also be triggered by 200 transactions or more within a year.
Starting in 2022, eBay will issue a Form 1099-K to sellers who make $600 or more on the platform. This change no longer takes the number of transactions made within a year.
3. Make Use of Business Tax Deductions
There are certain tax deductions that you can make use of to reduce the taxes you need to remit. However, eBay Business Owners can only use the ones the IRS authorizes. Most of these tend to be business expenses used to maintain your business. However, it should be noted that you’ll need to keep the receipts and keep records of these transactions to claim these tax deductions. Some of these tax-deductible expenses include:
- Advertising Expenses
- Storage and Inventory-related costs
- Banking fees
- Automotive and Travel fees for business purposes
- Home Internet and Office Expenses
These are some of the business expenses you can use to reduce the income tax on your 1099-K. More information on this subject can be found on the IRS’ official website.
4. Calculate your Cost of Goods Sold
Another potential deduction you can make use of is COGS. Also known as “COGS”, the Cost of Goods Sold can be summarized as the direct costs incurred by producing goods sold. COGS must be calculated and reported to the IRS as it can be used to reduce the total amount of tax obligations. The general formula for calculating COGS is as follows:
Cost of Goods Sold=Beginning Inventory+Additional Inventory-Ending Inventory
Inventory is classified under COGS, stipulating that only inventory sold can be written off. Any unsold items that remain are considered an asset of the business. Another potential expense under COGS is any expenses on materials used to sell the product.
5. Using Reliable Bookkeeping Systems for eBay Sellers
To remain compliant with your tax obligations, keeping financial records handy via Bookkeeping is a good idea. This is the process of recording and keeping financial transactions daily. When you prepare your tax returns, having your business records available can make the process easier. Not only that, it can help you to keep track of your sources of revenue and keep track of deductible expenses.
Most especially, having clean business records can help when the IRS inspects you. Upon examining your tax returns, they may request you to explain any of the items written on them. The accurate set of records you get with a reliable bookkeeping system can help all parties reach a resolution quicker and save you the headache of digging up lost records.
With many businesses looking into improving their bookkeeping solutions, cloud-based Bookkeeping seems to be the next big step. Take time to figure out what system you’ll need for your online business and how to utilise it.
6. Make Use of eBay’s built-in tools
eBay collects Sales Tax depending on the sale price of your products, along with remitting them to the appropriate tax agencies. They have also created tools to track the amount of Internet Sales Tax collected by the site. This can be seen through the Orders Report page for sellers registered to the site. You may also access it from the Seller’s Hub if you need it in a CSV format.
7. Incorporating your eBay Online Business
One option that your business can take is restructuring your business. One option is to apply to become a Limited Liability Company or LLC. This has the benefit of having the option to be taxed on the grounds of either a sole proprietorship or a C Corporation.
There is also the option to apply for S Corporation status. This classification benefits smaller business ventures, allowing them access to specific advantages regarding taxation.
LLCs may find themselves attempting to transition into an S Corporation. However, it’s important to note the specific requirements for their application. Some requirements include the number of shareholders being less than 100 and ensuring that all of them are residents of the US.
8. Using the Correct Tax Jurisdictions to avoid penalties
Some complications exist in determining the exact tax rate using a ZIP Code. These codes are not exact areas but encompass various roads and postal routes. It’s not rare to find a ZIP Code that encompasses multiple tax jurisdictions within its area.
You may find yourself using the rates of the wrong jurisdiction, which may lead to issues. Most worrying, there may be special district taxes that you may leave out that can land you in the range of an audit.
To correctly identify your tax jurisdiction, one good tip is to use the latitude and longitude coordinates to pinpoint the exact destination of your tax remittances. You may contact a qualified CPA to reconcile this issue if you are unsure of your tax jurisdiction. If needed, you can talk to us so we can discuss the information you need about your tax situation in detail.
9. Automation of Tax Processes
To some degree, the filing of your tax returns can be automated. This tip is especially effective when used with online bookkeeping and accounting services. Accounting software nowadays tends to have features that can do tax calculations for you.
Other accounting software suites also have detailed overviews of your tax situation. These include information on how much you owe regarding taxes and what type of taxes these are.
Filing taxes on time is also a problem that newer businesses can encounter. One added feature that might prove invaluable against this issue is accurate tracking of when tax payments are due. This can help all business owners avoid any extra fees related to late remittances.
Overall, automation of tax processes helps minimize the risk that business owners are exposed to. It also helps increase the efficiency of tax processes, saving time and allowing you a quick response to audit requests.
10. The Hiring of Professional Tax Firms – taxes for eBay business owners
Should these tips sound complicated, you can employ professional CPA firms to manage your tax situation. Hiring these agencies can bring many financial and organizational benefits to your business. This measure can save you the time necessary for navigating tax requirements yourself. CPA firms will also help you steer clear of any expenses related to errors made in tax processes.
If you’re looking for a CPA firm that’s right for you, look for one that’s specialized in working with eBay Business owners. Free Cash Flow is one of these firms focused on providing world-class support for taxation and accounting issues. Our team has over 20 years of experience working with Digital Agencies, Content Creators, and Online Sellers across various platforms. Use our free 30-Minute Strategy Session, and discuss various tax and accounting strategies to optimize your business.