Income tax is due on April 17 this year—and that’s coming up! This is a big year for online sellers, since the tax laws affecting sellers have changed drastically. Below are three tax tips that will help you sort through the taxing prep work of taxes.
Tax tip No. 1: Prevent an audit by paying attention to your 1099-K
This year, for the first time, the third-party payment processors that many online sellers use are required to report a seller’s income to the IRS. Companies like PayPal and Amazon Payments are required to do this reporting for anyone who sells more than $20,000 and 200 items. You already know if you are in this group—you would have received a 1099-K form in the mail in early February.
For most of you, your online sales revenue will be reported on a Schedule C form that’s attached to your regular personal tax return. The important thing is to ensure that Line 1D on this form is the same or more than the sum of the totals from any 1099-Ks that you received. The IRS will compare these two numbers. The 1099-K is telling the IRS how much you made, so the IRS expects you to report the same or more income on your taxes.
Tax tip No. 2: Lower your taxes by keeping track of all of your expenses
You may have felt like you were having a heart attack when you saw the revenue total reported on your 1099-K. The 1099-K reports your gross sales number, which is higher than what you probably think you made.You only pay taxes on your profit, which is gross sales minus expenses and deductions
But don’t worry—you don’t pay taxes on your gross sales. You pay taxes on your profit, which is gross sales minus expenses and deductions. Since the IRS knows your gross revenues as reported on your 1099-K, your job is to tell them your total expenses and, thus, lower your taxes.
Common expenses that online sellers have include marketplace fees, shipping, cost of goods sold (your costs to buy products), refunds and returns. One great way to keep track of many of these expenses is to sign up for a PayPal Debit Card and use that for your business expenses. The debit card should be attached to your business’ PayPal account. This allows you to track everything in one place and keeps your business expenses separate from personal expenses, not to mention the cash back that PayPal gives you.
You can link your PayPal account to the free Outright tool. It will pull in all of your transaction data directly from PayPal and automatically categorize the transactions into the appropriate tax categories. (And if you didn’t track anything during 2011, Outright can still pull in all of that data from January 2011 and on).
Tax tip No. 3: Don’t forget your deductions
Deductions are expenses you can deduct from your taxes but that don’t involve a cash transaction. The most common deduction we see online sellers take is the mileage deduction. The IRS allows you to deduct about 55 cents per mile for any mileage you had related to business. This requires that you kept records of it. We recommend using a smart phone app, such as Mile Bug to do this. Also, many online sellers will take a home office deduction, which can significantly reduce your taxes if you qualify.
I know that with all of the tax-law changes affecting online sellers this year, it can be difficult to navigate your tax return this year. But with a little bit of prep work and a small amount of effort throughout the year, you can ensure that you are well prepared for 2012 taxes next year.