Protect Your eBay Business from Audits
You know that eBay's not exempt from government regulations, so get the lowdown on what you need to know to keep your business on the up and up.
I'm not going to waste this column space telling you to shred your old paperwork, clear up your shipping area or, better yet, get your inventory organized so it's no longer the hellacious mess it became soon after you started your eBay business. What I am going to tell you about are your government responsibilities.
When you have a small business, Uncle Sam and his state affiliate cousins knock at your door on a regular basis. Filing all your forms and paying your taxes correctly and on time will hopefully keep you off of the master audit list. But even more important is keeping good records for your business. When you keep your books current, filling out your tax forms takes a lot less time--and if you do get audited, you'll have everything at the ready.
Beyond keeping track of your gross sales and expenses for your end-of-year returns, there are a few other state-mandated responsibilities you need to take seriously: your state sales tax (if applicable), employee data recording and your quarterly payroll taxes.
State Sales Tax
First, know that you only have to charge sales tax if you're selling to a customer in the same state your business is located in and if your state has a sales tax to begin with. If you don't have to bother with this, consider yourself lucky. Otherwise, there's a simple step you can take to ease the burden.
My primary recommendation is that you keep the sales tax you collect in a separate bank account so the money's available when the time comes to send it in. The seller who collects sales tax gets another bonus--the tax ID number issued by the state is also usually a reseller or sales permit. This number will magically open the doors to buying wholesale merchandise to sell on eBay.
Since the state sales tax issue varies so much by state and I can't outline it all in detail here, check your state's official website to get more information.
Many small eBay sellers may only have one or two employees--others may have 15. In either case, the drill's the same. You can run your business with your own Social Security number, but once you get employees, you need to get an Employer Identification Number.
To obtain an EIN, call the IRS Business & Specialty Tax Line at (800) 829-4933. An IRS representative will take your information and assign you a number over the phone. Or if you're the online type (and what eBay seller isn't?), you can go to https://sa.www4.irs.gov/sa_vign/newFormSS4.do to access the application, IRS Form SS-4. You'll get your EIN as soon as your online form is successfully submitted.
When hiring a new employee, you must get their Social Security number and have them fill out a W-4 form to indicate the number of deductions to take from their paycheck. When you get an employee's Social Security number, it's always a good idea to go to Social Security Business Services Online to confirm that the number is valid.
Another important piece of paperwork to fill out is Form I-9. The Immigration Reform and Control Act requires employers to have their employees fill out this form to confirm that they're legally eligible to work in the U.S. A new employee must show you their Social Security or Green Card to confirm their eligibility--and you should make a copy of it. You don't file this form with the government, but you must keep it on file for three years after the hire or for one year after the employee is terminated. You can find out more about Form I-9 at the U.S. Citizenship and Immigration website.
You don't want to make mistakes on your taxes, so using a program such as QuickBooks, and subscribing to their payroll updates, will give you all you need to keep up with the frequent changes to the U.S. tax code. For instance, I can automatically fill out and print my quarterly federal payroll reports (Form 941) right out of QuickBooks--the program calculates everything based on my posted payroll. Also, the program's sales tax report takes all the pain out of filing that form. You can generate a report that includes all the pertinent data you need for any period of time selected.
Forgetting the part Uncle Sam plays in your business can be an expensive mistake. Penalties add up quickly, and, not surprisingly, the government rarely accepts "I didn't know" as a legitimate excuse.
Editor's Note: The information in this column is provided by the author, not Entrepreneur.com. All information is general in nature, not legal advice and not warranted or guaranteed. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.