When you run a small business, the thought of paying taxes can be really scary, especially if it’s your first time. Here are some tips to help you understand your eBay business taxes.
But first…if you have a regular accountant, I recommend you speak with him/her about your eBay business venture. I am not an accountant and can only speak from research I’ve conducted and my own personal experiences. A professional will be able to give you a lot more information relevant to your specific situation.
Remember to Set Money Aside
It’s important to remember that you will need to pay taxes on your eBay business at the end of the year. So that what you pay isn’t a total shock, I recommend setting a portion of your net income aside each month. As a rule, I set aside about 30% of everything I make. It goes directly into a separate savings account that I use to pay my taxes later.
Hire a Professional
Ultimately, if you make money your first year in business (which you should), then I recommend you hire someone to do your taxes for you. It isn’t expensive and it will save you a lot of stress and frustration in the end. When you run a business, it’s totally worth the minimal expense.
Eventually, you’ll want to start paying your taxes quarterly. You can avoid extra penalties, interest, and even get an additional tax break by doing this. Your accountant will be able to provide you with an estimated total to send the United States Treasury every three months. I’ve found this to be preferable, as I don’t have to worry about paying a huge, lump sum at the start of the next year.
If you don’t make any money or sales, you can claim $0 profits for the year. Be careful with this, however. If you claim $0 for three years in a row, the government will declare your business a “hobby” and you will no longer be able to file a business, claim deductions, or receive related tax breaks.
If you opt to file your own taxes, the form you’ll probably fill out is the Profit Or Loss From Business (Sole Proprietor) Form 1040.
Track the Right Numbers
Taxes can be frightening, but don’t let yourself get overwhelmed. At the end of the day, as long as you keep track of a few key figures, you will have everything your accountant needs. That doesn’t mean you should throw everything else out, though. It’s important to keep all of your financial documents for several years just in case you’re audited down the road.
To help obtain everything you need to for your eBay business taxes, here are a few important numbers I recommend you track closely throughout the year:
There are several words for money in business, but the only two that really matter are Revenue and Cost of Goods Sold. Let’s take a second to define revenue. Revenue is the total amount people have paid for items you sell, including taxes and shipping. Ultimately, it’s the sum of all the money you have coming in for your sales.
It’s important to track this number because you will need it for your eBay Business taxes. It’s the very first number requested on the Form 1040.
Cost of Goods Sold
The second most important number you need to track is Cost of Goods Sold. I talk about this a little more below in the deductions, because it is a deduction – the largest one you’ll probably have. Cost of Goods Sold is the total amount you paid for all of the items you have sold. You can only write off inventory that you have sold. Unsold inventory does not count as a deduction.
You’ll need this number to fill out the Form 1040. In fact, there’s a whole section dedicated to it.
Profit is your Revenue minus Cost of Goods Sold and all other business deductions. This is what you will ultimately be taxed on. The tax rate should be approximately 33%. While you definitely want to “profit” each year, the lower this number, the less you will have to pay.
It’s worth noting that Profit is not necessarily what ends up in your pocket. Just because your business profited a certain amount, doesn’t mean that you paid yourself that amount. You could, for example, run a business that profits $100,000, but pay yourself only $30,000 of it. In this case, you might reinvest the other $70,000 to continue expanding your business.
I choose to pay myself about $4,000 a month. That’s what I need to live comfortably and still put a decent amount in savings. While I could pay myself more, I intentionally reinvest as much as possible back into my business. This helps ensure I’m continually growing each year.
Document Your Deductions
Paying taxes is not, however, the end of the world. You’ll be able to write a lot of your business expenses off as tax deductions. Some examples are things like office supplies, account subscriptions, and education. It’s incredible, actually, how much money you can save just by investing in your business.
In order to cash in, however, you’ll need to make sure that you keep track of your business expenses. I do this in an Excel spreadsheet, but you should use whatever method works best for you.
Want More About eBay Business Taxes
If you’re serious about your eBay business taxes, I can help more. I’ve created an entire course that provides step-by-step guidance building your business. It covers tax information in more detail. The course is called Your First Sale Plus eBay Seller Success in 14 Days or Less. This 7-module, 19-lesson course can get you started for just $29.