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Making Tax Prep for Online Sellers Easier

Top 3 tips to help you sort through the 'taxing' work of filing taxes
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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.

About the author

Steven Aldrich
Steven Aldrich is CEO of Outright.com, an online bookkeeping tool for small businesses. Previously, he was president and CEO of Posit Science. He joined Posit Science from Intuit, where he created significant growth over 13 years in many roles. He was vice president of Strategy and Innovation of the Small Business division, where he accelerated growth by solving important customer problems through partnerships and acquisitions. He guided the QuickBooks Industry Solutions and QuickBooks Point of Sale teams to several successive years of significant employee engagement increases, customer experience improvements and revenue growth. Steven completed his MBA at the Stanford Graduate School of Business. Opinions expressed here may not be shared by The Online Seller and/or its principals.

  • Dana Abdou

    are ebay sellers considered tax payers as any other employee in USA?

    • http://www.facebook.com/lmesserschmitt Laura Messerschmitt

      Yes, they are!  Income is taxable, regardless of the source of that income… just remember to track your expenses, since those will reduce your taxes.

  • Scottlittle60

    We started selling items on ebay in sept 2011 n we purchase alot of our items at flea mkts, yard sales, going out of business sales, etc. and therefore don’t have many receipts showing what we bought or how much it cost. We have records of everything. Will this be acceptable for the IRS without actual receipts/invoices. Try getting a receipt at a yard sale or flea mkt. good luck. Any answers ????

    • http://www.facebook.com/steven.aldrich Steven Aldrich

      Scott – sorry for the slow reply.  I think the answer is “it depends.”  Great that you have records of what you purchased.  If you wrote down the amount you spent and the items that add up to the amount, that should work.  But if the examiner is skeptical and/or the costs seem too high and it looks like you are trying to minimize your net income, it could be an uncomfortable conversation.  One idea is to take pictures of the items as you buy them so you can show you bought the item and the condition it was in.