The Lowdown on Taxes for eBay Sellers
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The Lowdown on Taxes
for eBay Sellers
Session 2, Intermediate Version
Wednesday, February 27,
11:00am PT/2:00 pm ET
Presented
by
Cliff
Ennico Presented
by
Laura
Messerschmi8
Tax and Legal Expert Financial Industry Expert
Attorney & eBay Author Outright
Housekeeping
• Is this webinar being recorded?
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TopRatedSellerWebinars site.
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Agenda
• Income Taxes: Beyond the Basics
• Estimated Taxes
• Employees and Contractors
• Form 1099 and the New Form 1099-K
• Sales and Use Taxes
• “Drop Shipping” and Consignment Sales
For the purposes of this presentation, we are assuming you are a sole proprietor or LLCDisclaimer (Our lawyers made us do it)
• This publication is designed to provide general information regarding the subject
matter covered. It is not intended to serve as legal, tax, or other financial advice related
to individual situations. Because each individual’s legal, tax, and financial situation is
different, specific advice should be tailored to the particular circumstances. For this
reason, you are advised to consult with your own attorney, CPA, and/or other advisor
regarding your specific situation.
• The information and all accompanying material are for your use and convenience only.
We have taken reasonable precautions in the preparation of this material and believe
that the information presented in this material is accurate as of the date it was written.
However, we will assume no responsibility for any errors or omissions. We specifically
disclaim any liability resulting from the use or application of the information contained
in this material.
• To ensure compliance with requirements imposed by the IRS, we inform you that any
US federal tax advice contained in this communication (including any attachments) is
not intended or written to be used, and it cannot be used for the purpose of (i) avoiding
penalties under the Internal Revenue Code or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed herein. Always
seek advice based on your particular circumstances from an independent advisor.Income Tax “Triggers”
• If you make $1 or more in profit (NOT gross sales),
you must pay income taxes
• If you make $400 or more in profit (NOT gross
sales), you must also pay self-employment taxes
(FICA and Medicare)
• If you have tax liability of $1,000 or more (NOT profit
or gross sales), you pay “estimated taxes” in four
quarterly installments (April 15, June 15, September
15, January 15)
– Usually kicks in somewhere between $5,000 and
$8,000 in profitCoping with Estimated Taxes
• Two ways to calculate estimated taxes
– “Safe Harbor”—110% of last year’s tax liability;
– SWAG Method—100% of projected tax liability for this year.
• Learn how to “escrow” for estimated taxes so there’s
always enough cash on hand to pay them.
• Here’s how you do it:
– At the end of each month, total your gross income for the
previous month;
– Take a percentage (I recommend 30% to 40%) of the total and
deposit it in a separate, interest bearing account;
– Keep doing this each month.XYZ Sellers $51,453.42
XYZ Sellers $51,453.42
$4,423.27
1,911.65
9,873.97
2,433.56
4,423.27
In Outright, click on “Taxes” and then “Quarterly Taxes”Forms and Deadlines
– For sole proprietors, husband-wife
partnerships and single member LLCs,
Schedule C to Form 1040 (due April 15)
– For other partnerships and LLCs with
more than one member, Form 1065 (due
April 15);
– For regular and S corporations, Form
1120 or 1120-S (due March 15)
– You can extend filing date by 6 months,
but not tax payments – if you owe taxes,
you must pay on time!Report ALL Your Income
• All income must be reported
– If all you get is checks, credit card payments and PayPal, there’s nowhere to hide;
– If you’re in a business that involves lots of cash payments, you will be audited,
sooner or later.
• The total income you report must equal or exceed the total of all Forms
1099/W-2 attached to your tax return.
• Must have backup documentation for ALL cash payments.Deductions: Avoiding Pitfalls
• Accountants won’t always volunteer information about what can and
cannot be deducted.
• Build a library of “checklist” books on deductions you can take
[some listed at end of this presentation], and ask your
accountant for advice on your eligibility for them.
– For a list of common deductions eBay sellers can take,
check out Cliff Ennico’s “The eBay Seller’s Tax and Legal
Answer Book”
• Never deduct expenses that were reimbursed by an employer
or client!
• Be conservative when taking “aggressive” deductions the IRS
always zeros in on (meals, entertainment, “business
conferences” in another country) – consider not taking them at
all if they’re not significant.
• Cliff’s Rule: “the more fun an activity is, the less likely you can
deduct it on your taxes”.Employees and Contractors
• Should you hire people?
• Anyone who works with you is either an “employee” or
an “independent contractor”
– Employees get W-2s, and payroll taxes (income/withholding,
FICA, FUTA and Medicare) are withheld by the employer
– Independent contractors get 1099s, and they withhold taxes
(income/withholding, FICA and Medicare, not FUTA)
• If you can “direct and control” a person’s activities (tell
her what to do and when to do it), she is an employee!
– It doesn’t matter what your contract with the person says
– It doesn’t matter how many hours the person works for you
• You have to get this right – the IRS audits heavily in this
area1099s
• The Basics:
– If someone works for you, is not an employee, and you pay him/
her more than $600/year through check or cash, you are required
to send him/her Form 1099 in January of the following year.
– Must be a paper form – order them from the IRS well before
December.
– You don’t have to send 1099s to corporations and other “legal
entities” you do business with (such as multimember LLCs).
– But . . . You still have to send 1099s to individuals and
“unincorporated businesses” (such as single member LLCs).
– Common sense: if you pay someone more than $600/year, and
you don’t think they will report it as income on their taxes, send
them a 1099!What if you Get a Form 1099-K? The 1099-K is a form that PayPal sends to you and to the IRS to report your revenue
Dealing with Form 1099-K
• PayPal (and other online payment providers) sent 1099-
K’s between 1/25/13 and 1/31/13
• You will get one if your 2012 PayPal sales met or
exceeded:
$20,000 or more in sales AND
200 or more items sold
• It includes all of your PayPal accounts under the same
tax ID.All of these are included in the 1099-K total! • Shipping revenue • Sales tax collected • Fraudulent payments received • Sales that were returned • What it DOESN’T include are COGS, expenses and deductions – you have to deduct these on your 1040
How to handle the 1099-K
• Reconcile… make
sure it’s right
• Expenses… lower
your taxes
• Deductions…
lower your taxes
• Double Check…
your gross receipts
REDD It!Double Check
Double check that the gross
income reported in Part 1 of
your Schedule C matches or
exceeds your 1099-K reported
sales (Box 1)Sales Tax: The History
Quill Corp. vs North Dakota (1992)Sales Tax Steps • Nexus… which states? • Investigate and Register… What are the requirements? Where do I register? •Collect… Set up and Collect • Track and Remit… Send in the money
Sales Tax Basics: Nexus
• If your state has a sales tax, you MUST collect and pay sales
tax whenever you sell to people in your state (“in-state sales”)
– There is NO EXCEPTION for sales on the Internet!
– You must register with your state tax authority and get a
sales tax ID Number (called a “resale number”)
• You do not have to collect sales tax when you sell to people in
other states, BUT
• If you have a “physical presence” in another state (called a
“nexus”), you must collect and pay that state’s sales tax
whenever you sell to people in that state
– If you have an office or PO box in that state;
– If you are partners with someone in that state;
– If your merchandise is stored in a warehouse in that state,
or
– If you take consignments or “drop ship” items for people in
that stateFBA and Nexus • Arizona • Delaware (no sales tax) • Indiana • Kansas • Kentucky • Nevada • Pennsylvania • South Carolina • Tennessee • Texas • Virginia • California (soon) • Be careful to double check the terms of Amazon’s state “deals”
Investigate and Register
• For each state, find out:
• Requirements
• Rates
• Exempt Items
• How to Register
http://outright.com/blog/sales-tax-resources-for-
online-sellers-in-every-state/Collect Do it and forget it: • Collecting through Amazon… they charge a fee • eBay will collect for free; look at help section for instructions • Another option… Not collecting, but paying anyways
XYZ
XYZSellers
Sellers $51,453.42
$51,453.42XYZ
XYZSellers
Sellers $51,453.42
$51,453.42XYZ Sellers $51,453.42
When You Buy Inventory • You must notify the seller that you intend to resell the merchandise – otherwise you must pay sales tax! • You give the seller a “resale certificate” with your “resale number” • If you pay sales tax, you add it to your COGS (cost of goods sold) when selling the item on eBay
What the Heck is a “Use Tax”? • Every state that has a sales tax has a use tax as well (an “inverse sales tax”) – Usually the same rate as the sales tax – You report use tax on the sales tax return form • If you buy something for your own consumption (not inventory) and do not pay sales tax on it at the point of purchase, you must pay a “use tax” to your state. • If you have “nexus” in another state, you pay that state’s use tax when you buy something from a resident of that state for your own consumption (not inventory) and do not pay sales tax on it at the point of purchase
“Drop Shipping” and Consignment Sales • You have “nexus” for sales tax wherever your drop shipper/ consignor is located • For example, if you are in NY, and you “drop ship” for a company in Ohio that has physical locations in Ohio and Iowa: – You pay NY sales tax when a NY person buys; – You pay Ohio sales tax when a Ohio person buys; and – You pay Iowa sales tax when an Iowa person buys. • Make sure your dropship/consignment contract requires them to tell you where they have locations • Make sure you warn residents of those states that sales tax will be added to their winning bid or “Buy It Now!” price • There are sample forms at the end of Cliff Ennico’s best- selling book “The eBay Seller’s Tax and Legal Answer Book”
Four Reasons to Buy Cliff’s Book • It contains detailed chapters with everything you need to know about income, sales and use taxes when selling on eBay • It contains the following useful forms: – “Terms and conditions” section for eBay listings – Drop-shipping contract – Consignment contract • It’s only $19.95 (less from some eBay sellers)! • The cost of the book may be fully deductible . . . The eBay Seller’s Tax and Legal Answer Book
XYZ Sellers
XYZ
XYZSellers
Sellers $51,453.42
$51,453.42
$59,418.25 $51,453.42
$8,434.21
Etsy AccountXYZ Sellers $51,453.42
$508.38lauram@outright.com
crennico@gmail.com or
www.cliffennico.com
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