When you sell on eBay, you are a retailer--and that means you are subject to every tax brick-and-mortar retailers have to pay. Here are 10 tax mistakes you don't want to make.
1. Not Paying Income Taxes: You are required to pay income taxes if you make at least $1 in profit (not gross sales) during a calendar year, even if you treat your eBay selling as a hobby.
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2. Not Paying Self-Employment Taxes: If you make more than $400 in profit, you must pay self-employment taxes (FICA, FUTA and Medicare), as well as income taxes--these come to about 15.3 percent of your eBay profits.
3. Not Paying Quarterly Estimated Taxes: If you make more than $1,000 in profit, the IRS won't wait until April 15th to get their money. You have to estimate your income and self-employment taxes four times a year and pay in quarterly installments. For details, see IRS Publication 505.
4. Using Your Social Security Number as a Tax ID: Don't use your Social Security number as a business tax ID, even if the IRS allows you to, because you will have to give it out to a lot of people. Go to the IRS website (www.irs.gov), fill out the application for a federal tax ID number (Form SS-4), and use that instead.
5. Not Taking the Home Office Deduction: It's not an "audit trigger" anymore and may well be the biggest deduction you can take. For details, see IRS Publication 587.
6. Mixing Business and Personal Expenses: If you use a computer to sell on eBay, and your teenagers use it to play video games and access the internet, you can deduct only the percentage of time you are using it in your business. Keep log books showing the percentage of time you use your computer, automobile and other equipment for business, as opposed to personal use.
7. Deducting Inventory Costs: You cannot deduct the cost of your inventory, your shipping supplies or sales taxes you pay to acquire inventory. Instead, you record these items as the "cost of goods sold" and deduct them from the winning bid amount as each item sells. For details, see Intuit Corp.'s "eBay Tax Center" at www.taxcenter.turbotax.com.
8. Not Paying Sales Tax: If you sell something on eBay and the winning bidder lives in the same state as you, you must pay sales tax to your state government if your state requires it. Register your business with your state tax authority, and remind eBay bidders from your state that "state and local sales taxes will be added to your winning bid." That way you can tack the sales tax onto the winning bid amount so it doesn't eat into your profits.
9. Not Sending Out 1099 Forms: If you take consignments of inventory from individuals or businesses (other than corporations) and pay them $600 or more during the year after deducting your sales commissions, you must send them each a Form 1099 by January 31st of the following year.
10. Not Printing Out Your "My eBay" Page: Your "My eBay" page records all of your eBay sales and fees, but only for the past 60 days. Be sure to print out your "My eBay" page each month so you have the records on hand come tax time.
Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Seller's Tax and Legal Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.