Do I Have to Pay Taxes If I Sell Clothes Online?

Selling clothes online is common, whether decluttering a closet or running an online boutique. Income from these sales can be subject to tax. This guide clarifies tax obligations for online sellers.

Understanding When Sales Are Taxable

Whether your online clothing sales are taxable depends on if the IRS considers your activity a “hobby” or a “business.” A business aims for profit, while a hobby is for pleasure. The IRS considers factors like how you conduct the activity, time and effort invested, and if you depend on the income.

If you sell personal items for less than their original purchase price, this is considered a personal transaction or hobby sale, and the income is not taxable. For instance, selling a used sweater for less than you paid does not generate taxable income, and any loss cannot be deducted.

Conversely, if you sell items with the intent to make a profit, or purchase new items specifically for resale, your activity is considered a business. All income generated from business sales is taxable, including situations where you sell items for more than their original cost.

Online marketplaces and payment apps must report transactions to the IRS using Form 1099-K if certain thresholds are met. For 2024, the threshold is $5,000; for 2025, it is $2,500. A recent legislative change aims to revert the 1099-K reporting threshold to $20,000 and 200 transactions.

Even without a Form 1099-K, all business income must be reported on your tax return. Many states have lower 1099-K reporting thresholds, so you might receive a form even if you don’t meet the federal threshold. The seller is always responsible for reporting all taxable income.

Calculating What You Owe

If your online sales are taxable as a business, calculate your net taxable income by summing gross receipts and subtracting allowable business deductions. Gross receipts are all money received from sales before expenses, forming the starting point for income tax calculation.

You can reduce taxable income by deducting legitimate business expenses. Common deductions include the cost of goods sold (original purchase price of items sold for profit or new inventory for resale), shipping costs, platform fees, packaging supplies, and advertising.

If you operate your online selling business from home, you may deduct home office expenses. These deductions reduce your gross profit to your net profit, the amount on which income tax is calculated. Only expenses directly related to your business are deductible.

Sales tax is separate from income tax. It is collected from the buyer at the point of sale and remitted to the state tax authority. Most online marketplaces operate under “marketplace facilitator laws,” requiring them to collect and remit sales tax for third-party sellers, simplifying the process.

However, if you sell through your own website or channels not covered by marketplace facilitator laws, you are responsible for collecting and remitting sales tax in states where you have “nexus.” Nexus is a sufficient connection to a state, established by physical presence or meeting economic thresholds like sales volume or transaction count. Thresholds vary, but many states set them around $100,000 in sales or 200 transactions.

Keeping Accurate Records

Maintaining detailed and accurate records is important for any online seller. The IRS requires documentation to support all income, deductions, and credits reported on tax returns, providing evidence for inquiries.

For income records, sellers should retain sales receipts, statements from payment platforms like PayPal or Venmo, and any Form 1099-K received. These documents provide a clear picture of gross receipts.

For expenses, keep receipts for all inventory purchases, shipping costs, platform fees, packaging materials, and advertising. Document any other business-related expense with supporting receipts or invoices.

Tracking inventory is recommended. A log detailing items bought and sold, including purchase dates, original prices, selling dates, and selling prices, is valuable. This record helps calculate the cost of goods sold and determine taxable gains or losses for each item.

Reporting Your Income and Sales Tax

After gathering income and expense records and completing calculations, report these figures to tax authorities. For income tax, if your online selling is a business, report income and expenses on Schedule C (Form 1040), “Profit or Loss from Business (Sole Proprietorship).” This calculates your net profit or loss, which flows to your individual Form 1040.

Net earnings from self-employment are subject to self-employment tax, covering Social Security and Medicare contributions. For 2024 and 2025, the rate is 15.3% (12.4% for Social Security, 2.9% for Medicare). This tax is calculated on Schedule SE (Form 1040), “Self-Employment Tax,” and applies if your net earnings are $400 or more.

If you expect to owe at least $1,000 in tax for the year (including income and self-employment tax), you may be required to pay estimated taxes quarterly. This helps meet obligations as income is earned, avoiding a large year-end bill. Failure to pay sufficient estimated taxes can result in penalties.

For sales tax, if you are responsible for collecting and remitting it (meaning a marketplace facilitator does not handle it), you must register with the state tax authority in each state where you have nexus. You will then file sales tax returns according to the frequency required by each state (monthly, quarterly, or annually). These returns report the sales tax collected and the amount due.