Your Guide to Your First Year Paying Taxes as an Online Seller

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Going from “employee” to “self-employed” can be a huge shock any way you look at it. Suddenly you’re free to set your own hours, but then again the only person you have to talk to at the coffee pot is your cat.

And then there are taxes. As a W-2 employee, you should experience taxes are fairly straightforward. When you’re self-employed, things aren’t that simple. These are the basics you need to know about your new tax-filled reality as a self-employed person:

You are Responsible for Paying ALL the Taxes

The United States is a “pay as you go” tax system. That’s why, as a W-2 employee, your employer deducted taxes out of your check each pay period and sent them in to the IRS and your state’s income tax authority. As a self-employed person, you don’t get the luxury of someone sending those taxes in for you. You will want to set aside about 1/3 of your income (i.e. profit) to pay Uncle Sam and friends. And if you end up owing more than $1,000 in taxes on April 15th, you should actually be remitting taxes to the federal and state governments quarterly! (Read more about Quarterly Estimated Taxes here.) Also, realistically, you probably won’t get a tax refund. Boo!

Many people make lots of money from eBay or other online sales venues but don’t realize they have to pay taxes on this income. Unfortunately, the IRS requires that a taxpayer file taxes (specifically a Schedule C) if they have made over $400 in net earnings from self-employment.

It’s Up to You to Track Income and Expenses

Fortunately, as a business owner you get to deduct your business expenses from the amount of taxes you owe. This includes a home office deduction, mileage for sourcing trips and trips to the post office, money you pay to seasonal helpers, and many more deductions. But if the IRS ever has a question about your business spending, you must be able to back those deductions up with documentation, in the form of a receipt.

It’s also important that you track all of your income. As we saw this year with the 1099-K form, payment processors like PayPal, Amazon and credit cards are now required to report your income to the IRS. If there is a discrepancy, you could get anything from a stern letter, to an automatic tax adjustment, to an audit.

You Will Have to Deal with Sales Tax

Even online sellers are required to collect sales tax from buyers in states where they have “nexus. “ Nexus is a physical presence, such as your office, a store, or a drop shipper. If you are in Oklahoma but partnered with your sister who lives in New York, you must charge sales tax to buyers in both states. If you’re unsure how to get started collecting sales tax, check out Sales Tax Resources for Online Sellers in Every State.

Amazon FBA sellers have an especially hard row to hoe here. Because they ship from Amazon’s warehouses, they technically have nexus in every state from where their goods might ship. Here’s the most up-to-date list of states with an Amazon warehouse.

You Will Meet New Tax Forms

You will file the standard 1040 as a self-employed person. But you will also meet new tax forms such as the Schedule C (where you report income and expenses from self-employment), the Schedule SE (where you calculate how much self-employment tax you must pay – yep, that’s a thing) and the new 1099-K.

Good News! Mistakes CAN Be Fixed

All this information might seem overwhelming. The good news is, even if you mess u on your taxes this year (or last year!), things can be fixed. It’s possible to file an amended tax return if you feel like you sent in erroneous information. The IRS really isn’t out to get you (though it may feel like it sometimes.)

We hope this post has helped you make sense of your first year filing taxes as an online seller. For more info, check out Outright’s Online Seller’s Guide to Taxes.

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