AllThingsWorn Taxes: How to Report Income From Selling Online

Selling items online through platforms like AllThingsWorn has become a popular way for individuals to earn extra income. However, understanding the tax implications of these sales is essential to ensure compliance and avoid issues with tax authorities.

Business or Hobby Status

Determining whether your online selling activities on platforms like AllThingsWorn constitute a business or a hobby is key to understanding your tax obligations. This classification impacts how income is reported and what deductions are allowed. The IRS evaluates factors such as intent to make a profit, time and effort invested, and the manner in which the activity is carried out.

If you sell items regularly with the goal of generating profit and maintain organized records, the IRS is more likely to classify your activities as a business, allowing you to deduct ordinary and necessary expenses like advertising and office supplies. If your selling is sporadic and lacks a profit motive, it may be classified as a hobby. In that case, you can only deduct expenses up to the amount of income earned, with limitations.

The IRS also considers the seller’s expertise, history of income or losses from the activity, and whether the income is relied upon for livelihood. A consistent profit or efforts to improve profitability can support a business classification.

Determining Self-Employment Tax

Understanding self-employment tax is critical for accurate reporting when selling items online. This tax includes Social Security and Medicare taxes, which are typically withheld by employers for traditional employees. As an independent seller, you are responsible for calculating and paying these taxes yourself. For 2024, the self-employment tax rate is 15.3%, covering a 12.4% Social Security tax and a 2.9% Medicare tax. Only the first $160,200 of combined wages, tips, and net earnings is subject to the Social Security portion.

To calculate your self-employment tax liability, subtract allowable business expenses from gross income to determine net earnings. Multiply the net income by 92.35% to find the amount subject to self-employment tax. This calculation accounts for the fact that traditional employees only pay half of these taxes, with employers covering the other half. As a self-employed individual, you pay both portions.

Reporting Income

Reporting income from online sales requires careful record-keeping and adherence to tax regulations. Sellers on platforms like AllThingsWorn must report income on Schedule C (Form 1040), which is used to declare profit or loss from a business. Accurate records of all revenue and expenses are essential for precise tax reporting and maximizing deductions.

All income must be reported, even if it falls below the threshold for receiving a 1099-K form from payment processors. As of 2024, third-party payment platforms must issue a 1099-K for sellers whose gross payments exceed $600 in a calendar year. If you don’t receive this form, you are still legally obligated to report all income. Failing to report income can lead to penalties and interest charges, especially if discrepancies are discovered during an audit.

Deductible Business Expenses

Understanding deductible business expenses is vital for reducing taxable income. For sellers on platforms like AllThingsWorn, common deductions include advertising costs, such as social media promotions or platform-specific ads. These expenses meet the IRS’s criteria for ordinary and necessary business deductions.

Costs related to maintaining an online presence, like website hosting fees or domain registrations, are also deductible. If part of your home is used exclusively for business, you may qualify for a home office deduction, which allows you to deduct a percentage of your mortgage or rent, utilities, and insurance based on the square footage of your workspace.

Inventory Costs

Inventory costs are a significant aspect of financial management for online sellers. Inventory includes items purchased or produced for resale. The IRS requires businesses to follow specific rules for valuing and deducting these costs. Sellers must choose between the cash or accrual accounting method, as this affects how inventory is reported. Under the accrual method, costs are deducted when items are sold, whereas the cash method allows for immediate deduction upon purchase if certain criteria are met.

Valuation methods include cost, lower of cost or market (LCM), or retail. For example, if an item is purchased for $50 but its market value drops to $40 by year-end, the LCM method allows you to value the inventory at $40. Proper valuation ensures compliance with IRS rules and prevents overstating taxable income. Maintaining detailed records of inventory purchases, such as receipts and invoices, is critical. Tools like inventory management software can simplify tracking and calculating your cost of goods sold (COGS), which is reported on Schedule C.

Shipping and Packaging

Shipping and packaging costs are deductible business expenses. These include postage, shipping supplies, and courier services. For example, if you spend $10 on postage to mail an item to a buyer, this is fully deductible. Packaging materials like boxes, tape, and labels also qualify, provided they are used exclusively for business purposes.

Detailed records of shipping and packaging costs, including receipts and tracking invoices, are essential. Many sellers use online postage services, which provide monthly summaries of shipping expenses to simplify record-keeping. Even if you offer free shipping to customers, the associated costs are deductible as part of doing business.

Listing Fees

Platforms like AllThingsWorn often charge listing or transaction fees, which are deductible expenses. For instance, if the platform charges a 10% fee on a $100 sale, the $10 fee is deductible. Subscription fees for premium accounts or promotional features are also eligible.

To ensure accurate deductions, sellers should review account statements from the platform, which typically provide a breakdown of all fees charged. Categorizing these fees separately in bookkeeping records simplifies tax preparation and provides insights into the costs of using the platform.

Sales Tax Considerations

Sales tax compliance is increasingly complex due to evolving regulations. Many states require online platforms to collect and remit sales tax on behalf of sellers under marketplace facilitator laws. For AllThingsWorn sellers, this means the platform may handle sales tax collection in certain states. However, sellers should verify whether the platform collects sales tax for all applicable jurisdictions, as they may still need to remit tax in some states.

Sellers must determine whether they need to register for a sales tax permit in their state or other states where they have a tax nexus. Nexus may be established through physical presence, such as storing inventory in a state, or economic presence, such as exceeding a sales threshold. Failure to comply with sales tax obligations can result in penalties and audits. Tax automation software can help calculate, collect, and remit sales tax accurately.

Bookkeeping Essentials

Accurate bookkeeping is the foundation for managing taxes and finances. Sellers on AllThingsWorn should maintain detailed records of income and expenses, including receipts, invoices, and bank statements. Accounting software like QuickBooks or Wave can streamline data entry and generate financial reports.

Regularly reconciling accounts by comparing records to bank and platform statements ensures accuracy. Discrepancies should be addressed promptly to avoid reporting errors. Expenses should be categorized correctly to maximize deductions, such as separating advertising costs from shipping expenses. Organized and accurate records simplify tax preparation and support informed financial decisions.