How to Report eBay Income on Taxes
Renting a store and stocking it with goods is a well-traveled avenue to sales. Another approach is the eBay way — electronic commerce that can be done from your computer at your home or office.
This article introduces you to tax reporting and planning for an eBay business. You will learn that your tax reporting responsibilities and planning possibilities are more when you are in business. You have fewer responsibilities when your eBay sales are not frequent and just personal items.
Business Tax Deductions for eBay Sellers
Your tax professional will confirm the tax rules apply to your eBay business in much the same way as any field of commerce. This assumes you are in business. Reporting eBay income on your taxes may even be quite familiar, if you’re already in business.
If you’re in eBay business, any form of eBay sales received in your eBay account will generally be included in gross sales.
Business owner deductions get subtracted from gross income in determining your eBay earnings for taxes from sales of goods. The general rule for qualifying as a tax deductible business expense asks if the outlay is an “ordinary and necessary” one, and whether it was connected with the taxpayer’s trade or business. There are many details, such as special rules or limitations on how to compute a particular tax deduction, which your tax professional can explain.
In general, the cost of goods sold can be subtracted in determining business income. What if you sell something in business and you had different costs for say two items? The tax rules may allow you to trace the exact cost of what you sold but it can also make assumptions, such as the item first purchased was the first one sold. This is an inventory method called FIFO - first-in, first-out. The inventory rules may be a factor in reporting your eBay income for taxes.
Other typical business expenses include the costs of supplies, license fees, computers, and auto expense for business driving occasioned by your eBay business.
eBay Sellers — Hobby or Small Business?
The tax rules have tests that distinguish between a hobby and a business. If your activities are considered a hobby, the basic rule is that your net loss is nondeductible even though your income, should you have net income, is subject to income tax. There are tests and special rules when there are recurring annual losses that surface the hobby loss question.
Assume you paid $1,000 for golf clubs and sold them for $500 on eBay. Do you have a $500 deductible loss because you are an eBay seller? No. You still have a personal loss, a loss from your hobby. The $500 receipt isn’t subject to income tax, whether you sell the clubs to your neighbor or to a stranger on eBay. Similarly, you might sell many personal items at a garage sale or on eBay and your many personal losses would be nondeductible.
What if begin a business, whether via eBay or otherwise, and you convert an old personal asset to business use? Say you had a personal computer that you converted to business use. The value of the old computer for tax is the $500 value when converted to business, not the old original cost. If you bought a computer for $1,000 and used it for business from day one, the $1,000 is the cost of the computer for business tax purposes.
How to File Your Taxes as an eBay Seller
If you are reporting eBay income for taxes, the sale would trigger business income reportable on Form 1040, Schedule C.
Business income reported on this schedule will also usually trigger self-employment tax.
If you are just using your eBay account on a rare occasion to sell a personal asset but you are not in business, when you have taxable gain, you would generally report it on Form 1040 as other income.
IRS Form 1099-K vs. 1099-NEC
Our tax system may require those that know you have eBay income to tell the IRS and state taxing authorities on an annual basis.
As a seller on eBay, you will likely receive a Form 1099-K, which is used by credit card companies and third-party processors like PayPal to process payment transactions.
In your stack of year-end forms, you may also have Form 1099-NEC. The “NEC” stands for “non-employee compensation.”
You are less likely to be getting IRS Form 1099-MISC, though there are some types of income that will bring this form into your mail box.
These forms report business income that starts on Form 1040’s Schedule C, “Profit or Loss from Trade or Business, Sole Proprietorship,” before eventually ending up in the taxable income line of eBay sellers.
How to Get an IRS Form 1099-K from PayPal
When you sign up for internet sales, beginning in 2022, PayPal will track and report payments of $600 or more to eBay sellers. The pre-2022 tax rule focused on $20,000 and 200 transactions as the threshold for filing this form. The minimum number of transactions rule also went away in 2022. So on-line eBay sellers will generally be getting the 1099-K if they are in business in 2022.
Writing Off Your Expenses as an eBay Seller
If your eBay sales for taxes rise to the level of a trade or business, you may claim your related deductions on Form 1040, Schedule C. The form even lists many common expenses which could apply to an eBay business.
As an eBay seller, you may even qualify as having a “home office.” See Form 1040, line 30. This will tell you about the simplified method for computing a home office deduction, and refer you to IRS Form 8829 if you claim the deduction but don’t use the simplified method.
A few eBay transactions won’t convert you into a “trade or business” such that you can deduct residence costs as home office.
When Is the Tax Deadline for Filing eBay 1099 Taxes?
eBay taxes would be reportable on your calendar year Form 1040 for 2022 due April 17, 2023. However, penalties are possible if you do not make adequate estimated tax payments. The 2022 estimated tax payment dates are April 18, June 15, September 15, and January 17, 2023. Also, do not forget withholding when you have one or more jobs.
Remember that one-time or rare use of eBay does not mean you are in business. However, it is also possible that the recurring use of eBay is a business for tax purposes. Your tax professional can help with such issues as when you are in business, business deductions, and self-employment tax from online selling on eBay.