Do eBay Sellers Pay Taxes? Income and Sales Tax Explained

Engaging in online sales through platforms like eBay comes with tax responsibilities. The Internal Revenue Service (IRS) and state tax authorities consider income generated from selling goods online as taxable. Understanding these obligations helps sellers comply with tax laws and manage their finances effectively.

Identifying Taxable Income

All money received from sales, before any deductions or expenses, is considered gross income by the IRS. This applies whether sales are occasional or part of a regular business operation. A distinction for tax purposes is whether your eBay selling activity is a hobby or a business.

The IRS uses several factors to determine if an activity is a hobby or a business. A primary indicator is whether you engage in the activity with the intention of making a profit. Factors suggesting a business include conducting the activity in a business-like manner, maintaining accurate records, dedicating time and effort to make a profit, and depending on the income for your livelihood. Conversely, if the activity is primarily for personal pleasure, or if it consistently results in losses, it may be viewed as a hobby. If an activity makes a profit in at least three out of five consecutive years, it is presumed to be a business. Income from a hobby is taxable, but expenses related to it cannot be deducted, unlike business expenses.

While platforms like eBay may issue a Form 1099-K, for the 2024 tax year, the threshold for receiving this form is $5,000 in gross payments, regardless of the number of transactions. All business income is taxable, even if you do not receive a 1099-K form. Selling personal items at a loss, such as an old bicycle sold for less than its original purchase price, is not considered taxable income and does not need to be reported. However, selling a personal item for more than its original cost would result in a capital gain that is taxable.

Self-Employment Tax Considerations

Individuals operating an eBay business are considered self-employed by the IRS. This designation carries the responsibility of paying self-employment (SE) tax. Self-employment tax covers contributions to Social Security and Medicare, which are withheld from wages for traditional employees. When self-employed, individuals are responsible for both the employer and employee portions of these taxes.

The self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. This tax is calculated on your net earnings from self-employment, which is your gross income minus allowable business expenses. For 2024, the Social Security portion of the tax applies to the first $168,600 of your combined wages and net self-employment earnings, while the Medicare portion applies to all net earnings.

Since taxes are not withheld from self-employment income, self-employed individuals need to make estimated tax payments throughout the year. These quarterly payments cover both income tax and self-employment tax obligations. Failing to make sufficient estimated tax payments can result in penalties. The IRS provides Form 1040-ES, Estimated Tax for Individuals, with worksheets to help calculate these payments, which are due on April 15, June 15, September 15, and January 15 of the following year.

Reporting Income and Claiming Deductions

Individuals operating an eBay business report their income and expenses using Schedule C (Form 1040), Profit or Loss from Business. This form allows business owners to detail their revenue and subtract eligible business expenses, ultimately determining their net profit or loss. The net profit calculated on Schedule C is then transferred to Form 1040, the individual income tax return, becoming part of the taxpayer’s total taxable income.

A wide range of ordinary and necessary business expenses can be deducted, reducing the amount of income subject to tax. The cost of goods sold (COGS) is a significant deduction, representing the direct costs of products sold, including purchase price, shipping to acquire inventory, and preparation for sale. Other common deductible expenses for eBay sellers include eBay listing and final value fees, payment processing fees (e.g., PayPal fees), and shipping costs for sold items. Packaging supplies, such as boxes, tape, and labels, are also deductible.

Expenses related to advertising and marketing for the online business are deductible. If a portion of your home is used exclusively and regularly for business, you may be able to claim a home office deduction, which can include a percentage of rent, mortgage interest, property taxes, and utilities. Business-related mileage or travel for purposes like sourcing inventory or attending trade shows can also be deducted. A portion of internet and phone expenses used for business purposes is also deductible. Professional services fees, such as those paid to accountants or legal professionals, and business insurance premiums, are deductible.

Self-employment tax is calculated on Schedule SE (Form 1040), Self-Employment Tax, using the net profit from Schedule C. A portion of the self-employment tax paid, specifically one-half of the amount, can be deducted from gross income when calculating adjusted gross income. This deduction helps offset the fact that self-employed individuals pay both employer and employee portions of Social Security and Medicare taxes.

Payments can be made electronically through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS). Maintaining meticulous records is important for all income and expenses. Accurate and organized records, including receipts, invoices, and bank statements, are necessary to support claimed deductions and ensure accurate reporting in case of an IRS inquiry. The IRS suggests keeping records for at least three years from the date you filed your original return.

Sales Tax Responsibilities

Sales tax is distinct from income and self-employment taxes; it is a consumption tax collected from buyers on behalf of state and local governments. Unlike income tax, which is paid on net profits, sales tax is remitted to the state where the sale occurs.

A business’s obligation to collect sales tax in a particular state is determined by whether it has “nexus” in that state. Nexus signifies a sufficient connection or presence that triggers a sales tax collection requirement. Historically, this meant a physical presence, like having an office, warehouse, or employees in a state. Following the 2018 Supreme Court decision in South Dakota v. Wayfair, economic nexus laws have become widespread. These laws require businesses to collect sales tax if they meet certain thresholds for sales volume or transaction count within a state, even without a physical presence.

For most eBay sellers, the sales tax collection process is simplified due to marketplace facilitator laws. In most states, eBay, as a marketplace facilitator, is responsible for calculating, collecting, and remitting sales tax on sales made through its platform. This means that for items sold on eBay, the platform handles the sales tax obligations for the seller.

Despite eBay handling sales tax for marketplace sales, sellers might still have sales tax responsibilities in certain situations. If you sell items outside of eBay, such as through your own website or at local markets, you are responsible for collecting and remitting sales tax in states where you have nexus. Even if eBay collects sales tax for marketplace sales, you may still need to register for a sales tax permit in states where you have nexus. This registration is necessary for potential direct sales or for issuing resale certificates when purchasing inventory. Specific requirements for sales tax registration and collection vary by state.