The Basics of Taxes for Online Sellers
August 20, 2018
The internet is thriving now more than ever, which is good news for online sellers. If you’re a seller on eBay, Amazon or another online retail platform, you’re reaping the benefits of society’s online fixation. Just remember while you’re raking in that online cash: taxes for online sellers can be mandatory.
You need to pay income tax on profits from sales if they surpass a certain threshold. Beginning in 2011, online businesses such as Amazon are required to file 1099-K forms for those who earn beyond $20,000 in gross sales or have 200 transactions in a calendar year using their platform.
Have you only sold a few lower-priced items on a whim this year? Maybe you posted a Beanie Baby (and not even a rare one!) on eBay and got some cash for your troubles? You don’t need to worry about taxes for online sellers if you only sell occasionally and don’t make a substantial profit from your sales. And did you sell items for less than their purchase price? Then you need not report the sales on your return.
Who Needs to Pay?
Do you have consistent or recurring sales? And do you run the activity like a business with an intention to make a profit? Then you need to pay income tax on your sales!
The income you earn is considered ‘income from self-employment’. Therefore, you must file Schedule C, Profit or Loss from Business of Form 1040. You use Schedule C to report profit or loss from a sole proprietorship. If you don’t run a registered corporation, then you must use Schedule C to report your profits or losses.
Sales Taxes for Online Sellers
Along with income tax, you also need to pay sales tax. Especially when you sell in multiple states, you are responsible for collecting and remitting sales tax in each state. And the complex rules of each state can be wildly confusing.
Want to ensure you’re not making unnecessary payments or unknowingly neglecting your sales tax responsibilities? Our SalesNexusSolverTM is designed to analyze your sales tax responsibility and validate awareness of where in the U.S. you have nexus and the corresponding requirements.
Paying Estimated Taxes Quarterly
If you haven’t been paying taxes on your online income, you may pay estimated taxes quarterly to avoid IRS penalties and collection actions for non-payment of taxes. If you think that you’ll owe more than $1,000 in taxes in a year, the IRS prefers that you pay your taxes every quarter. The deadline for making quarterly payments for this quarter will fall on September 15. The remaining three deadlines will fall on January 15 (2019), April 15 (2019), and June 15 (2019).
To pay your estimated taxes quarterly, you may electronically file and pay your taxes through the Electronic Federal Tax Payment System (EFTPS), or fill Form 1040-ES and mail it to the IRS. You may also pay taxes over the phone.
If you have any questions about taxes for online sellers, contact one of our tax professionals who can help you optimize and save on taxes throughout the year.
The Dangers of Mixing Business and Personal Expenses
Mixing business and personal sounds like fun, but it can be pretty messy. When you’re mixing business and personal expenses, you’re putting yourself at major risk for an IRS audit, which is the opposite of fun. To ensure you don’t end up with a stressful audit, you should know how to define and separate business and personal expenses.
Business expense vs. personal expense
According to Publication 535 from the IRS, a business expense must be “both ordinary and necessary”. An “ordinary” expense is one that is common and accepted in your trade or business. A “necessary” expense is one that is helpful and appropriate for your trade or business.
For example, say you’re self-employed and running a cooking website as a small business. You can write-off the fancy cutlery you bought (if you’re using it for your business). But you couldn’t write-off a new television. You can deduct business expenses even if they are not indispensable to your business.
If you deduct personal expenses as business expenses, the IRS may conduct an audit. They may then ask you to remove the incorrect deductions and pay the balance.
Generally, you cannot deduct personal, living, or family expenses on your tax return. But what if you have an expense that is partly business and partly personal? You can divide the cost in half, and deduct one half as a business expense.
Avoid triggering an IRS audit
When you’re mixing business with personal expenses, your personal expenses can get confused with your business expenses. Sometimes it seems innocent, like extending a business trip for a week to include a vacation. But danger lurks when you are unsure of what you can deduct as a business expense, or you find yourself in a gray area.
In order to be certain you don’t trigger an IRS audit, consider the following:
- Never use your business credit or debit card for personal expenses.
- Keep business and pleasure trips separate. If combined, keep particular days for business and other days for family/friends.
- Don’t be tempted to write-off personal purchases (e.g., games, printer, computers, etc.) as a business expense unless you are using them to make a profit.
Other dangers of mixing business and personal expenses
Deducting business expenses as personal has another big danger: back taxes. If the IRS discovers that you deducted personal expenses as business expenses, they may charge a penalty for claiming false deductions and demand payment of the balance with penalties and interest if the filing deadline has passed. The unpaid balance after removing the false deductions will be treated as back taxes if you do not pay them before the filing deadline.
Instead of sorting out expense receipts later, it is advisable to separate your business and personal expenses for better organization and less stress at the time of tax return preparation.
Beware the Self-Employment Tax Trap
August 11, 2018
Self-employment seems like the perfect set-up. What could be better than reaching your dreams your way? However, there is one downfall. Wage earners who work for employers have their taxes withheld from their wages and deposited with the IRS. Meanwhile, the self-employed have to calculate and pay their taxes themselves. Self-employment tax rules are different from those for businesses, individual taxpayers and those working for employers. Generally, the IRS requires self-employed individuals to file a tax return if they earn $600 or more from self-employment.
Many times, you can underreport income and incur a tax debt due to not understanding IRS requirements or a lack of information. If you are self-employed, consider the tax rules below when calculating and paying your taxes.
Self-employed individuals must pay the self-employment tax in addition to federal income tax. Self-employment tax includes the individual’s Social Security and Medicare taxes. You also must pay an additional Medicare Tax of 0.9 percent. This additional Medicare Tax applies to wages, compensation, and self-employment income that is above a certain threshold.
Self-employed individuals may also be required to pay Estimated Quarterly Taxes. Estimated taxes include self-employment income and any other tax an individual must pay. As the name implies, these taxes are paid at specific intervals throughout the year. Generally, if you expect to owe more than $1,000 in taxes by the end of the year, you should be filing estimated taxes.
Many times, self-employed individuals do not pay estimated taxes quarterly and wait for the traditional filing deadline. This leads to tax debt, as correctly paying estimated taxes every quarter is necessary to remain compliant with the tax laws. The IRS even charges a penalty for underpayment of estimated tax.
Tax Credit and Deductions
There are many deductions that you can claim. You can deduct certain qualifying business expenses from income to reduce taxes. Many self-employed individuals who work from home use the Home Office Deduction.
Self-employed individuals can claim the Earned Income Tax Credit if they file Form 1040 Schedule C. This tax credit reduces the tax liability of those employed by an employer or work independently.
Want to avoid mistakes in calculating taxes and running the risk of a debt? Either seek the help of a tax professional or keep yourself up-to-date about the tax laws that impact you.