All eBay sellers are responsible for managing their taxes and remitting them 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 the reporting of online sales. With all of these taken into consideration, a new seller might be overwhelmed with this information. This guide aims to make sure that you can keep on top of your taxes, as well as ways for you to stay compliant with taxation laws and regulations.
Income and Sales Tax
The first type of tax that eBay sellers will need to 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 themselves charge sales taxes on behalf of the online seller, even without prior setup. Sales tax is automatically calculated and charged upon customer checkout, allowing eBay business owners an easier time in dealing with these transactions. This is due to certain states enforcing a Marketplace Facilitator Law which shifts the responsibility of collecting sales tax to the marketplace facilitators, which would be eBay in this case.
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 nexus or an 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 that you’ve been selling in states where there are no marketplace facilitator laws in place. eBay does have dedicated tools for calculating the sales tax you need to charge. However, it does not offer any way of calculating any of the hundreds of individual sales tax rates present within 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 involves refunding the sales tax charged as well. If the seller used eBay to process the refund request, most of the process is already automated by the site. To see the amount of Internet Sales Tax collected by eBay, visit the Orders Report page on your Seller Hub. You’ll also be able to 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 refund amount required. 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.
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By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.
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 which is similar to sales tax. One example is a seller that’s selling to UK customers and has inventoried stored in the UK as well. 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 more easily navigate through the different rules and regulations in different states. Some options include Quick Books Online and Xero which have toggle able options for sales tax.
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’re able to charge and remit sales tax. To register for one, make sure to visit the state’s tax website and read up on the rules and regulations regarding this permit
However, the presence of Marketplace Facilitator Laws has made 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 who have already registered in-state and do not sell their products in other venues such as physical stores.
For Income Taxes, you’ll need to fill out Form 1099-K and report your annual online sales figure. Starting in 2022, all businesses that make over $600 in annual online sales will need to fill out this form. However, this does not necessarily mean that 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 be compliant with tax laws regarding 1099-K.
Managing Your Tax Obligations
eBay business owners have many tools at their disposal to make the tedious task of managing tax obligations a bit easier on them. Various strategies may also be employed to not only keep on top of changing tax regulations but also 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 kind of 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 having to dig 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, it’s better to invest in tax compliance rather than pay any fines that may stem from an audit.
2. Distinguishing between Business and Hobbies
The IRS takes into consideration whether your online store can be classified as either a business or a hobby. If you do not meet the requirements necessary to be classified as a business, the IRS may prevent you from making use of certain tax deductions. It also has the chance to trigger an IRS audit which can be a messy affair if you’re not prepared for it.
eBay business owners will have to prove that their business is intended to make a profit to not 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 amount of time. High-risk ventures tend to be given more leeway in this situation, expanding the time frame up to 7 years.
3. Hire Reliable Accountancy Firms
Another option that some online sellers on eBay have gone for is the hiring of CPA firms to manage their tax obligations. Outsourcing your accounting processes to a reliable CPA firm will make it so that you have 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 to enact tax planning strategies to make use of tax deductions and credits that you may have potentially 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 it comes to dealing with taxes.