First, let me give you the normal “I am not an accountant, this is not tax advice” speech, but look, that said, I was sitting on a cruise about a month back at breakfast and got to talking to the lady next to me. She asked what I did for a living, and I told her I was an online seller that sold on Amazon and eBay. She said she was an accountant and did taxes for a lot of people that sold online. She quickly asked me if I was paying taxes on eBay fees. I know that eBay fees are tax-deductible, but apparently, many of her clients didn’t.
The first thing is just basic business math. You have your costs of goods, which is the amount you pay for a product. If you sell a product for $20 but you paid $10 to get it, you can take the $10 off of the number that eBay gives you on the 1099 to get your income for the year. If you’re not doing that, you’re way overpaying your income taxes. People also didn’t realize that the selling fees they were paying on eBay also come off of that. It’s also part of your cost of goods; it’s not income that you’re making, it’s actually eBay’s income. Shipping also applies. If you paid to ship the item, that can come off, but if you’re charging for shipping, and it cost you $10, and you charge $15, the $5 difference would be income to you.
The eBay fees, typically 15%, and if you’re advertising, say, at 5%, so there’s 20% of that sale. If you sold an item for $20, and your cost of goods is technically $14, your income on that would be $6 and not $10. This is not a big deal on one item, but if you add this up over the course of the year, it becomes a rather large number. People may have been smaller sellers and eventually got bigger, and maybe it was the first time they got a 1099 for it. (You are required to pay taxes even if you don’t get a 1099.)
If you have not been doing this, you need to take some time out and learn how your cost of goods are figured. This is a very basic business thing. Second, you need to be keeping records of this. You can get this from eBay. They give you a monthly invoice of the fees that are charged. You can actually download a more detailed spreadsheet of this. More than anything else, you need to get a tax advisor and have somebody do the taxes for you. It will more than pay for itself because they understand what you can and cannot take off of your taxes. In this case, if you were paying tax on money that you didn’t earn, you’re overpaying your taxes. Running a business is always a learning experience, but you definitely need to understand it if you’ve been making this mistake.
Generally, everything that it costs you to sell an item is going to come off of your gross sales, and what’s left is going to be your profit. As a seller, there are a lot of expenses, such as shipping materials, internet access, and other things that your accountant can help you with. You will be surprised how much it will lower your tax burden each year.