What Taxes You Are Responsible for as an eBay Seller
There are three types of tax that you will be responsible for when you
start your eBay business. They are:
1) sales and use tax,
2) payroll tax and
3) income tax.
Sales and use tax - Just about every state, and many cities and other
local authorities, imposes a sales tax on items sold. Each state has
different rules, so it's important to find out the rules in your state
and city. As a seller, you are responsible for collecting and remitting
the proper sales tax to the state you live in. You are also responsible
for preparing and submitting a report detailing the amount of your sales
and the sales tax collected.
You may also be subject to use taxes. This is taxes on goods you
purchased out of state that you did not pay sales taxes on. The use tax
generally applies to items purchased out of state which would have been
subject to sales tax if the purchase transaction had taken place in
state. The use tax came about from the concern that purchasers could
avoid paying a state's sales tax by making their purchases outside the
Payroll tax - The second type of tax that you are responsible for as an
eBay seller is payroll tax. If you hire employees to help you with your
eBay business, you are required to withhold federal income taxes, Social
Security and Medicare taxes, and state income taxes. These taxes must be
submitted to the proper tax authorities on a periodic basis (usually
quarterly). In addition you must pay unemployment insurance and workers'
compensation on all employees.
If you operate your business as an S or C Corporation, you will need to
setup payroll for yourself, and remit payroll taxes on your own salary.
If you operate as a Sole Proprietorship, you pay self employment tax
instead of payroll tax.
Income tax - The final type of tax is the income tax. No matter how your
business is structured, you will be required to pay income tax on the
business' net profit.
Sole Proprietors pay income tax on their personal income tax return (Form
1040). Your business profit is calculated using Schedule C - Profit or
Loss From Business, and your profit is added to your other income to
determine your tax liability.
S Corporations file Form 1120S to report the business profit or loss. A
Schedule K-1 is then prepared, which shows each shareholder's share of
the net profit or loss that needs to be declared on their personal tax
C Corporations file Form 1120 to both report the business net profit and
to calculate the resulting income tax.
Depending on the state you do business in, you may also be subject to
state income taxes on your business profits. The state level taxes are
often referred to as franchise taxes.
Kristine A. McKinley, CPA, Certified Financial Planner®, and co-author of
Ebiz Tax Tips - How to Minimize Your Taxes and Maximize Your Profits,
offers financial and tax planning on an hourly, fee-only basis. She
specializes in helping home based and online business owners understand
and minimize their income taxes.
For more information on eBay and taxes, sign up for our free special
report 'Top 5 Tax Tips for eBiz Owners' or visit our blog at