How eBay 1099 Sellers File Taxes
eBay 1099 taxes don’t have to be complicated. You see, running an eBay store can be hectic and challenging. It is an online marketplace ripe with opportunity. But whether you do dropshipping, wholesaling, retail arbitrage, or sell your own stuff, you will need to figure out how to report your 1099 tax forms to the IRS. As a growing ecommerce store, you may feel overwhelmed, but there are tools you can use to make this process easier.
In this article we will go over:
- Whether to file your taxes as an online garage sale hobby or auction business
- How to estimate your 1099 income taxes as an eBay seller
- Which 1099 IRS form to fill out
- How to get your 1099
- Deductible business expenses as an eBay retailer
- When to file your tax return
- How to automate your expense tracking
Before we can understand how to file our taxes, we must know whether the IRS classifies your sales as a business or hobby.
IRS eBay Sales Classification: Hobby vs. Business
Many people use their hobbies to make money, that doesn't mean it is a business though. The difference is the intention behind the activity. Is the purpose for recreation or to make a profit? The Internal Revenue Service has a list of nine factors to help determine if your activity is a hobby. The IRS requires that we report income from our hobbies and businesses. The main advantage to operating as a business is you can write off more expenses. This will lower your tax bill. You must know how your sales are classified by the IRS before you can report your income.
As an eBay 1099 seller, your transactions fall into one of two classes:
- Business - The purpose is to make a profit.
- Hobby - If the intent is for recreation.
Many people think if they are selling on eBay rarely, then it's a hobby and they don’t have to report their earnings. This is false.
If you are selling your old items from around the house, then you are an online garage seller and hobbyist according to the IRS. If you are buying items with the purpose of reselling them on eBay for a profit, then you are classified as an online auction business. For more information on the differences between hobbies and businesses, check some tips from the IRS.
To be on the safe side, assume that you will owe taxes on your eBay sales if you sell over $600 worth of goods.
How to File Your Taxes as An eBay Merchant?
As a non employee you have to do your own federal, state, and self employment income taxes. Self employment taxes are known as FICA and include Medicare and Social Security.
Since you are self employed you will have to file your FICA taxes both as the business owner and as the employee. The self employment tax rate is currently 15.3%. Employees from companies usually only pay half of this on their W2 while their employer pays the other. As a business owner, half of this 15.3% is tax deductible, more on writing off expenses later.
As an eBay retailer in the United States, you might have to pay state sales taxes as well. Make sure to research if the state of you or your buyer requires a sales tax.
In general, If you have $600 or more in gross sales from your eBay business then you need to file a 1099 form. The proper 1099 to file varies on how many sales you make.
Missing an important detail on your taxes is a costly mistake that many small business owners make. It's understandable because filing your own self employment taxes can be a complicated process. Free up your time and make your tax seasons less stressful by filing your taxes online through Keeper Tax.
Form 1099-K vs 1099-NEC
As an eBay seller, the IRS considers you an independent contractor that performs services for a company rather than being a direct employee. You will file a 1099-NEC if you sold more than $600 in goods as discussed. The 1099-NEC form is replacing the 1099-MISC form from last year for classified non-employee work as of tax year 2020.
If you sell $20,000 and have 200 or more transactions, then you will file a form 1099-K.
It is not a good idea to guess how much you owe the government, instead of filling out your own 1099-k you need to use the form they give you. Many first time sellers don't know that eBay doesn't send your IRS form 1099k. They say that you must get the information from any third party network transaction company that “settles” the payments for your eBay business. Since you are selling on eBay that usually means you will get your PayPal 1099 or your chosen payment processor company.
At the time of writing this article, there is one exception to this rule. If you live in Massachusetts or Vermont and have of $600 in gross payments in your eBay account, then you will file the 1099-K instead of the 1099-NEC. Remember to not report your eBay business income on the 1099-NEC if you are going to get a 1099-K from PayPal.
How to Get a IRS form 1099-K From PayPal
The IRS set up federal laws that require PayPal to send you a 1099-K to help track down eBay sellers who don’t report their profits. This means that taxpayers who have a credit card merchant account such as PayPal or similar service will receive a 1099-K in most cases.
PayPal is required to send the IRS form 1099-K by January 31st for managed payments from the previous calendar year.
If you don’t want to wait for your form to arrive, you can read it online by logging into your PayPal account. If you don’t see your 1099 form, then don’t make the mistake of thinking you don’t owe taxes. Many small business owners in the eBay community fall into this trap. PayPal reports your 1099-K to the IRS. Before they know it, they are issuing them a bill for the gross amount plus interest.
Call PayPal to confirm if your tax form is coming or not. I also suggest that you contact eBay’s customer service just to be sure.
Writing Off Your Expenses as an eBay Seller
Along with filing your own income taxes as an independent contractor, you must keep track of your own deductible business expenses. Many eBay sellers think by only working part time that they don’t have to track their expenses.
Keeping a detailed and organized record of all your expenses is required to lower your tax bill. If you don’t, then your tax bill could be higher than the profit you made. That means that you could still pay taxes even if you didn’t make money in your business.
Avoid losing money by keeping your personal and business expenses separate. The best way to separate your expenses is by opening a business bank account and have an online 1099 expense tracking app do it for you. When your expense tracking is automated you don’t have to worry about keeping those pesky receipts or filling out long excel documents.
The most common deductible expenses for eBay sellers are:
- Inventory purchases and repair costs.
- Listing fees
- Advertising expenses
- Office Equipment - work dedicated chairs, desks, computers and office supplies
- Seller and payment transaction fees
- Shipping expenses
- The work related portion of your phone bill
- Inventory storage bins, rooms and management systems
- Legal fees such as setting up an LLC
- Productivity software - for example sales management or accounting software
- Gas costs when buying products to sell in retail stores or driving to the post office
- Part of your rent if you have a dedicated spot for work
- Traveling fees - if you go to seminars for eBay selling
- Related educational materials - like classes, or coaches
- Bank service charges
To report these tax deductions you will need to fill out a “1040 Schedule C Profit or Loss From Business Form”. This will include the eBay income from your 1099 form and the expenses that your business had in the last tax year. Here is a list of deductions for independent contractors.
When Do I File My eBay 1099 Taxes?
As an independent contractor, you are required to file your taxes quarterly if you will owe more than $1000 in taxable income. They want you to file for your estimated business income four times a year.
The quarterly tax dates are:
- Quarter 1 - April 15th
- Quarter 2 - June 15th
- Quarter 3 - September 15th
- Quarter 4 - January 15th
*These dates may be extended due to COVID in 2021.
If you miss a quarterly tax payment, late filers are subject to a penalty of .5% of the tax the day after the due date. The percentage increases the longer you don’t pay your taxes with a limit of 25% of the gross amount owed.
The best way to make sure you estimate your tax bills correctly is to use a trusted online estimated tax calculator.
Don’t guess on how much you owe the Internal Revenue Service, let me tell you it's not worth it.
Automatically Keep Track of eBay Expenses
Being self employed is highly rewarding, but only if you play by the IRS's rules. You can keep track of all your expenses by counting them out, but being an independent contractor is a very busy lifestyle. The best way is to use a service that automates your expense tracking for you. You want to be focusing on building your eBay business, not caught up in tax details.
The problem with many online expense trackers is that they lack personal touch from a certified bookkeeper.
Keeper Tax is an app that automatically tracks and sorts your qualified business expenses and assigns every subscriber a personal certified bookkeeper.
Their job is to find every tax deduction possible and to be a second line of defense against tax mistakes.
Instead of paying 300 a month for a CPA, Keeper Tax includes bookkeepers with their low monthly subscription. They can charge less because the tax and expense tracking software does most of the heavy lifting for the tax professional. With less on their plate, the accountants are able to review your deductible write offs and respond to your questions personally.
Doing your own taxes should not be challenging. Hiring a bookkeeper should not be expensive.
Why not have the best of both worlds?