How to Handle eBay Taxes the Right Way in 2023

by
Christian Davis
Updated 
January 19, 2023
January 13, 2023
Icon check
Reviewed by
a tax professional
How to Handle eBay Taxes the Right Way in 2023
by
Christian Davis
Updated 
January 19, 2023
January 13, 2023
Icon check
Reviewed by
a tax professional

The online marketplace is rife with opportunity. But selling on eBay can also get hectic — especially when tax time rolls around.

Whether you're drop-shipping, wholesaling, doing retail arbitrage, or selling your own products, you'll be nursing all the tax-related headaches that come with an online business. That means wrangling tax forms and paying your own self-employment taxes.

For busy online sellers, dealing with eBay taxes can be overwhelming. But don't stress: we'll give you all the tips and tricks you need to tackle this process like a pro.

Contents

Who has to pay taxes on their eBay sales?

Any seller who runs their store as a money-making business has to pay taxes on what they earn through the platform. 

You might be thinking, "Aren't all stores businesses?" Almost — but there are two possible exceptions:

  • Stores opened for online garage sales
  • Stores run as a hobby

The IRS treats these two types of stores differently, and both are distinct from actual businesses. Let's talk about the tax situations that can arise for each.

Virtual garage sales aren't taxed

Some eBay stores are essentially one-offs. They’re opened so someone can get rid of their old items.

Think of these as 21st-century versions of the garage sale or yard sale. They let people offload old clothes and appliances to a group bigger than their neighborhood. But they don't make anyone an actual business owner.

If you run a shop like this, you won't be taxed on what you earn. In fact, the IRS doesn't require you to report those earnings at all.

Keep in mind, though: there's potential for a slippery slope here. What began as a one-off garage sale can easily morph into a business if you end up doing it again and again.

If you find yourself buying up items for resale, for instance, odds are good that your virtual yard sale has become a real business. And that means dealing with taxes.

Hobby sales are taxed — but you can't take any write-offs

Somewhere between the online garage sale and the ecommerce business, there's a third category of eBay store that we're calling the “hobby shop.” These are run by casual sellers who still use eBay more regularly than someone doing an occasional spring cleanout.

If online sales are your hobby, current tax laws put you in the worst of both worlds. You'll have to report your sales income to the IRS, but you can't take any write-offs. (More on those later!)

So how can you tell if your eBay store is a business or a hobby? The difference lies in the intention behind it. Is it for recreation, or is it to make a profit? (The IRS also has a list of nine factors to help determine if your activity is a hobby.) 

Whether your store is a business or a hobby, you'll want to be on the safe side when it comes to budgeting for your taxes. Rule of thumb: Assume you'll owe taxes if you earn at least $400 from eBay sales.

If you are running a business, you can bring this number down by using write-offs. We'll get into that later!

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What taxes do you have to pay on your eBay sales?

Unless you’re using eBay for occasional garage sales, you’ll have to pay taxes on your profits. That’s what you earned from sales, minus your expenses: not just the money you spent on buying inventory, but also the other costs of running your store — inventory management, shipping and handling, advertising, and more.

What are the specific taxes to look out for? You'll have to pay self-employment tax and income tax on what you earn from sales. Depending on which state you live in, you might have to collect sales tax too.

Self-employment tax

Self-employment tax is the business owner's answer to FICA taxes, which include Medicare and Social Security taxes. 

Everyone has to pay FICA taxes, including W-2 employees. The tax rates, though, are twice as high for self-employed people like eBay sellers.

You see, traditional employees only pay 7.65% of their income in FICA taxes. Their employers match them for another 7.65%. Self-employed individuals, though, have to pay both the employee and employer halves, for a total FICA tax rate of 15.3%.

When we talk about self-employment tax, this doubled FICA tax rate is what we mean. Unfortunately, it can lead to some sticker shock for new sellers.

Luckily, you can lower these taxes by quite a bit using business write-offs

Income tax

Unfortunately, your tax obligation as a seller doesn't stop with FICA. You’ll also have to pay income taxes on what you earn from your eBay store.

Income taxes go to the federal government and — depending on where you live — your state. To make sure you're not caught off-guard, you can get a sense of how your income and FICA taxes will shake out using our income tax calculator.

Sales tax

Sales tax isn't, strictly speaking, a tax that you pay on your eBay income. It's something your buyers might have to pay, depending on where you operate.

Not every seller has to collect sales tax. It all depends on where you're based. If it is required, eBay will take care of collecting and remitting it for you.

The following states are exempt:

  • Alaska (Though some local boroughs do charge sales tax)
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

If you're surprised that most sellers have to deal with eBay sales tax, it's probably because that wasn't always the case.

Back in the day, a merchant had to have a physical presence in a state for sales tax to be required. We’re talking actual, brick-and-mortar storefronts. All that changed in 2018, when the Supreme Court came down hard on Wayfair, making things more complicated for everyone who sells (or shops) online.

Lowering your eBay taxes with business write-offs

An eBay store can be profitable, but managing one isn't always cheap.

Luckily, anything you spend on:

  • 🛍️ Stocking
  • 🗂️ Organizing
  • 📣 Promoting

or otherwise running your store counts as a business expense for tax purposes. 

You can use these expenses to lower your taxable income and cut down on how much self-employment tax you're paying.

Common write-offs for eBay sellers

Here are some deductible expenses eBay sellers should know.

General expenses

Inventory-related expenses

  • 🛍️ The cost of the goods you sell
  • 🔧 Inventory repair costs
  • 🗃️ Storage bins and inventory management systems
  • 📦 Shipping and handling costs

Store-related expenses

  • 💰 Listing fees
  • 💵 Seller and payment transaction fees
  • 😊 Trading assistants
  • 📣 Advertising expenses
  • 🖌️ Freelance copywriters, designers, or marketers

How to take advantage of tax write-offs

If you want to lower your tax bill with write-offs, you'll need to keep track of everything you spend on your eBay store in a calendar year. 

Good news: You don't have to go it alone. You can use Keeper. The app automatically scans your purchases for eBay-related write-offs, from your contractor payments to the goods you're selling.

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With your expense tracking automated, you can keep good records without doing any work on your own, like storing those pesky receipts or filling out a long Excel spreadsheet.

To report your tax deductions, you'll need to fill out a 1040 Schedule C: Profit or Loss From Business Form. That's also where you'll report your eBay income on your taxes. More on that later!

How to file your taxes as an eBay seller

If you sell on eBay, your tax situation will involve a lot of forms — forms you get and forms you fill out on your own.

Here's how to deal with them all, in a few digestible steps.

Step #1. Look out for your 1099-K form

For 2022, you'll get a 1099 form if you:

  • Made at least $20,000 in eBay sales
  • Had at least 200 sales transactions

These forms show the income you earned from self-employed business activities — in this case, running a store.)

The specific type of form you'll get is the 1099-K. These are sent out to freelancers, independent contractors, and business owners who get paid through third-party payment processors, like credit cards and PayPal. Naturally, that includes online sellers.

Originally, 1099-Ks were supposed to go out to anyone who made at least $600 off eBay in 2022. But the IRS decided not to drop the threshold for another year. "2022 will be a transition year," says Meg K. Wheeler, a CPA and finance coach, about the IRS delay. "What does that mean for you? A little less paperwork for your tax return this year and a little more for 2023's taxes."

Getting your 1099-K

Online platforms like eBay are required to make your 1099-K available by January 31st. 

You'll automatically get sent a copy in the mail. But you also have the option to download it directly from the Seller Hub.

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Step #2: Check out your 1099-K detailed report

In addition to your actual 1099-K, eBay will provide you with a detailed breakdown of the form, called your "1099-K detailed report." This shows you how much money you earned from every transaction that contributed to the income on your 1099-K.

There are two ways to get it, through the Seller Hub and through My eBay.

From the Seller Hub

The Seller Hub lets you customize a 1099-K detailed report by choosing the date range you want to look at:

  • Go to the "Payments" tab
  • Choose "Taxes" on the menu to the left
  • Select "1099-K detailed report"
  • Choose the date range for the transactions you want to look a
  • Hit "Create report"

From My eBay

If you'd like an overview of the whole year's transactions, you can do that in My eBay:

  • Navigate to "Payments"
  • Choose the "Taxes" tab
  • Hit "1099-K Forms"
  • Select "Request detailed report"
  • Look out for an email with instructions to download it

Step #3 Keep an eye on 1099-Ks from PayPal

If you sold at least $600's worth of goods through PayPal, you'll get a separate 1099-K from them

Just like with eBay's own forms, PayPal is required to send 1099-K by January 31st.

If you don’t want to wait for your form to arrive in the mail, you can access it online by logging into your PayPal account.

Step #4: Prepare to report your income, with or without forms

Whether your forms come from eBay, PayPal, or both there's one very important tip to remember: If you don’t see your 1099-K, that doesn't mean you don’t owe taxes.

Many small business owners in the eBay community fall into this trap. But no form doesn't mean no tax filing requirement.

"Regardless of whether or not you receive a Form 1099-K, all income received [through your business] must be reported on your tax return," says Wheeler.

Step #5: Report your income and write-offs on Schedule C

How do you report eBay income on your taxes? You'll use Form Schedule C. Your "gross receipts" — meaning, your earnings before expenses —  go in box 1 of the form. You'll also report any returns you gave to customers in Box 2.

Part I of a blank Schedule C with boxes 1 and 2 circled in pink

In Part II of the form, you'll report all your business expenses, so you can use them to lower your taxable income. That makes Schedule C your best friend as a seller — even if it can be a little tricky to fill out.

To make sure you're getting it right, check out our step-by-step guide to Schedule C, which has plenty of examples you can use to stay on track. Better yet, file your eBay taxes with Keeper! The app can fill out Schedule C for you after finding all your deductible expenses, so treat it as a one-stop shop for all your tax needs.

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When do you file eBay 1099 taxes?

Now that you know all about your eBay tax forms, there's one final wrinkle: dealing with quarterly taxes.

As an eBay seller, you're required to file your taxes quarterly if you expect to owe more than $1,000 in taxes in a year. 

Here's when those taxes are due:

  • Quarter 1 - April 15th
  • Quarter 2 - June 15th
  • Quarter 3 - September 15th
  • Quarter 4 - January 15th

Miss a quarterly tax payment, and you'll have penalties to deal with. Late filers will pay an extra 0.5% on top of their tax bill if they file even a day past the due date. The percentage increases the longer you wait to pay, up to a limit of 25%.

If those penalties sound scary, don't worry: filing your quarterly taxes is easier than it sounds. The best way to plan for them is to use a trusted online estimated tax calculator. 

At the end of the day, being self-employed is highly rewarding — as long as you play by the IRS's rules. If you don't want to keep track of the ever-changing taxation rules on your own, use Keeper.

Instead of paying $300 a month for a CPA, you can access tax filing and year-round bookkeeping for a low monthly subscription. The app costs less because it uses machine learning to do most of the heavy lifting. That leaves bookkeeping staff free to review your write-offs and respond to your tax questions personally.

With a personal bookkeeper in your pocket, you can spend less time stressing over tax details and more time building your eBay business.

Christian Davis

Christian Davis

websitetwitter-link

Christian is a copywriter from Portland, Oregon that specializes in financial writing. He has published books, and loves to help independent contractors save money on their taxes.

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