A Short Guide on Taxes for eBay Business Owners
All eBay sellers are responsible for managing and remitting their taxes on time. They are also responsible for discerning whatever tax laws apply to their business. This is further complicated by the regulations enacted by different localities and districts, which add to your total tax figures.
Currently, the IRS has also issued changes in online sales reporting. Considering all these, a new seller might be overwhelmed with this information. This guide aims to ensure that you can keep on top of your taxes and ways to stay compliant with taxation laws and regulations.
Income and Sales Tax
The first type of tax that eBay sellers must collect is Sales Tax. These are imposed on sales of specific goods or services. Within the US, the regulations regarding sales tax can vary depending on the location you’re selling at. A state may have differing sales tax rates and may have authorized local jurisdictions to impose their own sales taxes.
The next type of tax that eBay business owners have to remit is income taxes. These are imposed on the income you earn. Online sellers are required to remit income taxes on an annual basis. Lately, there have been changes in this regard as the IRS now requires online sales of over $600 to be reported on a seller’s Form 1099-K form starting January 2022.
Marketplace Facilitator Laws
eBay charges sales taxes on the online seller’s behalf, even without prior setup. Sales tax is automatically calculated and charged upon customer checkout, allowing eBay business owners to deal with these transactions easily. This is due to certain states enforcing a Marketplace Facilitator Law, which shifts the responsibility of collecting sales tax to the marketplace facilitators, eBay.
However, there are states where eBay does not automatically collect and remit sales tax. These states include Florida, Kansas, Louisiana, Mississippi, and Missouri. In these areas, governments will base your eligibility for sales tax on whether you have a sales tax nexus within the state. This can be either a physical or economic nexus, with every state having different rules for either type.
If you’re unsure whether or not your business has an established nexus within a certain state, it might be best to contact a tax professional or CPA firm to confirm your status.
Collecting Sales Taxes
Let’s say you’ve been selling in states without marketplace facilitator laws. eBay does have dedicated tools for calculating the sales tax you need to charge. However, it does not offer any way of calculating the hundreds of individual sales tax rates in an area. You can still use eBay’s stool for calculating a rough estimation, but chances are that you’ll be overcharging or undercharging some customers.
Refunds are a special case as this also involves refunding the sales tax charged. If the seller used eBay to process the refund request, the site already automates most of the process. To see the amount of Internet Sales Tax collected by eBay, visit the Orders Report page on your Seller Hub. You can also download the data in a CSV file format on this page.
However, some sellers make use of PayPal for their transactions and sales. In this case, the seller will be responsible for handling the refund of both the amount paid and the amount of Internet Sales Tax paid. They can do this by reviewing the PayPal transaction for the amount of tax paid and adding this to the required refund. Once the refund pushes through, eBay will credit back any refunded taxes. Business PayPal accounts can access transaction reports through the Tax Documents tab on the Reports screen.
Selling in other regions, such as the EU, still requires sellers to observe tax regulations. Here, sellers will have to charge and remit VAT or Value Added Tax, similar to sales tax. One example is a seller selling to UK customers and has inventoried stored in the UK. This will most likely make you eligible for remittance of VAT within the UK. You will also need to inform your buyers about any import charges and shipping costs that come with their purchase. However, if you use eBay’s Global Shipping Program, the site will automatically inform the buyer of any extra charges during checkout.
A good way of estimating sales tax for eBay sellers is by using digital software and automating the process. If you’ve been using digital accounting software in your business already, you can use these to navigate the rules and regulations in different states more easily. Some options include Quick Books Online and Xero, which have toggleable sales tax options.
Filing Tax Returns
When it comes to filing sales tax returns, the procedure might differ depending on the regulations of any single state. One requirement in the sales tax process is for the business to hold a sales tax permit within a state before they can charge and remit sales tax. To register for one, visit the state’s tax website and read up on the rules and regulations regarding this permit.
However, Marketplace Facilitator Laws have changed how states want sellers to manage their sales tax. Sellers who only sell on marketplaces like eBay and other online platforms may now opt to cancel their sales tax permits. This only applies to sellers already registered in-state and do not sell their products in other venues, such as physical stores.
You must complete Form 1099-K for Income Taxes and report your annual online sales figure. Starting in 2022, all businesses making over $600 in annual online sales must complete this form. However, this does not necessarily mean you’ll have to pay income taxes, as only products sold at a profit will be considered taxable. Due to this, eBay has asked all sellers on its platform to provide them with their SSN or ITIN numbers to comply with tax laws regarding the 1099-K.
Managing Your Tax Obligations
eBay business owners have many tools to make the tedious task of managing tax obligations a bit easier on them. Various strategies may also be employed to keep on top of changing tax regulations and reduce the amount you need to pay as much as possible. These Tax Planning Strategies are invaluable in saving your business important resources and funding for the future.
1. Reliable Bookkeeping
We’ve always emphasized the importance of a good bookkeeping system and how it can benefit any online seller. When it comes to tax obligations, a good record of your financial transactions can help you file your tax return easier. You’ll be able to save yourself the stress of digging out old receipts and scattered transactional data. There may also be potential tax deductions that may be unearthed by a good bookkeeping system, allowing you to reduce the amount you need to remit.
Bookkeeping also helps you answer any inquiries that may come up during an IRS audit. Although the chances for an audit are quite low, investing in tax compliance is better than paying any fines that may stem from an audit.
2. Distinguishing between Business and Hobbies
The IRS considers whether your online store can be classified as a business or a hobby. If you do not meet the requirements to be classified as a business, the IRS may prevent you from using certain tax deductions. It also has the chance to trigger an IRS audit, which can be messy if you’re not prepared for it.
eBay business owners must prove that their business is intended to make a profit, not to be classified as a hobby. The IRS tends to rule that a business is considered for-profit if it has made considerable sales within a specific time. High-risk ventures tend to be given more leeway, expanding the time to 7 years.
3. Hire Reliable Accountancy Firms
Another option that some online sellers on eBay have gone for is hiring CPA firms to manage their tax obligations. Outsourcing your accounting processes to a reliable CPA firm will give you more time to manage the growth of your business. Not only that, but they can also advise you on any new developments regarding tax laws and regulations.
A reliable CPA firm can also help you enact tax planning strategies to use tax deductions and credits that you may have missed. If you’re interested in these benefits, you may contact us via an online consultation, where we’ll discuss strategies that will make your business more efficient when dealing with taxes.