Selling on eBay and Your Income Tax Obligations
eBay is like any other business in that if you earn money selling on the platform, you need to report those earnings to the Internal Revenue Service. Unlike side hustles that pay cash, eBay sales are trackable through Paypal.
When it comes time to file taxes, always consult a licensed tax professional for tax advice. Here is what you need to know about eBay and taxes, and a few ways to stay organized so that when tax time rolls around, you won't be scrambling to find the correct documentation to file.
Receiving a 1099K Form From PayPal
The government has no way of seeing what you sold on eBay, or how much your sales were. They cannot look at your sales reports or access your account. However, if $20,000 or more was deposited into your Paypal account within 200 transactions for a calendar year, PayPal will report your earnings to the IRS, and you will receive a 1099K form.
According to the IRS, Form 1099-K, Payment Card and Third Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance. You should receive Form 1099-K by January 31st if, in the prior calendar year, you received payments:
- From payment card transactions (e.g., debit, credit or stored-value cards);
- In settlement of third-party payment network transactions above the minimum reporting thresholds of gross payments that exceed $20,000, and more than 200 such transactions
You will not receive a 1099K unless both conditions, $20,000 gross payments, and more than 200 transactions are met. This presents the next question.
Reporting Gross Sales Less Than $20,000
According to the IRS, if you only sell occasionally and your online sales are equivalent to a physical garage sale, you do not have to report your gross sales. Examples of this would include selling children's outgrown clothing or toys a couple of times a year, having moving sales as you downsize your possessions, or selling items as an online estate sale after a loved one has passed. There are a few conditions to help you determine if your eBay business is an actual business or a hobby:
- If you are intentionally purchasing items for resale, this is considered a business, and you should report gross sales.
- If you are selling items online on a regular basis, you should report the earnings.
Benefits of Reporting eBay as a Business
If you are buying items and reselling for profit, you are essentially running an eBay business rather than being considered a hobby seller. While you don’t need to register a business formally, if you’d like to be able to deduct your expenses to reduce your taxable obligation, you should consider setting up an S-corporation, a limited liability company, or establishing a sole proprietorship. Otherwise, there is a 2% floor for expenses.
For deduction purposes in the former scenario, it is imperative to keep good records. If you spend money on your business, keep receipts, and even better, record expenses in a spreadsheet monthly so that tax time isn't confusing or overwhelming. Here's the perfect spreadsheet for eBay sellers. According to the IRS, examples of expenses that may be deductible include:
- Inventory costs
- Inventory storage systems such as bins, tubs, or cabinets
- Office supplies such as tape, printer ink, cleaning supplies
- Mannequin or dress form
- Laundry products, stain removers, lint rollers
- Shipping supplies including boxes, plastic bags, bubble wrap
- Mileage when sourcing or going to post office
- Educational materials including eBooks, courses, books, or DVDs
- Professional services (accountant, attorney)
- Professional organizations
- Storage unit rental fees
- Subscriptions for services such as Terapeak, InkFrog, or Stamps.com
- Coaching or mentoring
- Advertising such as business cards, Facebook ads, or local newspaper ads
- Office furniture
- Repair costs such as computer or printer repair
- Travel to trade shows, seminars, or business events
- Bank service charges
If you do not have an accountant or CPA, it is best to search for one that comes recommended by someone you trust. Taxes are serious business, so you should do your homework and interview several tax professionals before turning your business over to them.
Ask around on Facebook for recommendations, or ask other small business owners in your area about their CPA. Small business owners are usually eager to help each other out and when it comes to professional references. Look on Yelp for reviews or check Angie's List. Make sure you hire an experienced, reputable professional. Audits are a nightmare, and you don't ever want one!sed tax professional for tax advice.