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How Taxes Work for eBay and Amazon Sales (It is not as bad as you think!)
 

One of the questions I am most often asked is about taxes. This is a short post that will hopefully help you to understand the reality of paying taxes that get reported to the IRS by PayPal, Amazon or another processor. I have posted it because the issue is misunderstood as many people think if they have $20,000 in sales then they owe taxes on $20,000 which would normally be about $3,000 - but that is FALSE.

The other misconception is that you only have to pay taxes if you earn more than $20,000 on any one account. But that is also false. You must report ALL income on all of your accounts, regardless of whether the payment processor sends a 1099k to the IRS.

Using an LLC is about staying stealth in PayPal and/or Amazon. It is not about tax evasion. That is something that neither I, nor the forum condone. However, most people end up paying very little in taxes.

Let's say you sell $20,000 worth of merchandise. That is your GROSS. From that $20,000 you deduct the cost of merchandise, supplies, postage, eBay and PayPal fees, refunds, lost merchandise and any other business expenses you may have. The figure you arrive at after deducting the expenses from your GROSS is your NET. An average profit for most businesses is between 8% and 15%. Let's say your actual profit is 10%, or $2,000. You would therefore owe taxes on $2,000 NOT $20,000. What percentage of the $2,000 goes to taxes depends on your tax bracket and other factors. It will not, generally speaking, go over 36% and that is if you are in the top tax bracket. Most people pay about 15% in taxes, so if that holds true with you, then you would owe $300 in federal taxes after all is said and done.

If you are married and filing jointly, then as long as your adjusted gross income (after personal and standard deductions) is less than $75,300, you would only pay 15%. In order to pay the top bracket of 36%, your gross income (your profits + any wages and other income you have) would need to be more than $413,350. If you are making $413k per year, then PAY YOUR TAXES! Nobody likes paying taxes, but it is the price we all pay for living in a civilized society. Military, Schools, Police, Fire, Garbage collection, Lighting on roads, Highways, Public Transportation, Health and Safety, etc. all cost money. So all of us must pay our share. It CAN be tempting to cheat, but TRUST ME, you do NOT want to find yourself in the middle of an audit unless you have reported everything honestly.

In fact, with your deductions and exemptions, if you are married and filing jointly, the first $21,000 in NET income is practically tax free anyway.

Some people are afraid of filing because they mistakenly think they will have to tell the IRS exactly WHAT they are selling and some people sell items that are a little bit on the shady side. But the IRS does not care what you sell. You do not have to give a line-by-line breakdown, it all goes into a field called "Cost of Merchandise Sold" - at no point in time do you divulge what your items are to the IRS.

This is not legal advice. I am neither an accountant nor an attorney. These examples are approximate, not exact and are not meant to represent the real situation of any individual. If you need advice on taxes, the best thing to do is consult an attorney or tax adviser with experience in these matters. It can save you a significant amount of money - they know about deductions that most people do not even know exist. I pay my tax guy nearly $1,000 per year, but he usually saves me about $4,000 per year in taxes - legally. And his fees are tax deductible!

Re: How Taxes Work for eBay and Amazon Sales (It is not as bad as you think!)
 

What the items you are selling have no cost or hard to measure the cost. Like the collections or from stores many years ago and no receipts.

Re: How Taxes Work for eBay and Amazon Sales (It is not as bad as you think!)
 

Talk to your advisers such as CPA.

If you get things for free, etc.... they you don't have a cost of goods. Still a ton of other deductions and maybe a professional has another tax law that helps you as well.

Re: How Taxes Work for eBay and Amazon Sales (It is not as bad as you think!)
 

Well, If it was something like comic books where there are price guides, you could look in the guides of past years and try to estimate what your original cost was.

There is no law that says you need receipts for every item. But if the IRS were to audit you, unless you have a receipt or can show the purchases on a credit card statement, they would look at your purchase costs and decide if they are reasonable or not. Most likely, they would use some sort of guides themselves. However, they can also disallow it entirely. Of course, that is all governed by IRS rules, probably many pages long and written in a way that nobody can understand. So the best person to ask is a tax pro.

Auditors look for things that are out of the ordinary, or for drastic changes from year to year. So, if you sold your comic collection consisting of 1,000 comics for $25,000 and you bought them 15 years ago and you are claiming they cost you $20,000 then they are probably going to look into that. If you claim they cost you $6,000 then that would look more normal. Of course, if you had some way of PROVING the $20,000 cost, then they would accept it.

Or, sometimes business owners have a drastic increase or decrease in profits or expenses. If you have been in business for 10 years and your business normally has a 15% profit and then this year, it is showing a 3% profit, they will want to know why. Often, there are pretty good explanations for this stuff. And most IRS auditors have built-in bull**** detectors. If they think you are trying to pull a fast one, they can go over everything item by item and disallow any deductions you cannot prove with a receipt. Most of the time, they are decent about it, as long as you have a plausible explanation of why the profits declined so drastically and a reasonable excuse for not having the receipts. For example, your pizza place had a food poisoning incident and word got around and you lost half of your customers.