How Much Tax Do I Pay on eBay Sales?
Unpack the tax implications of selling on eBay. Learn to accurately determine your taxable income and meet reporting requirements.
Understanding your tax obligations for eBay sales is essential, whether you sell occasionally or operate a regular business. Your sales can have tax implications. Knowing how the Internal Revenue Service (IRS) views online sales, how to calculate your income, and what taxes might apply helps ensure you meet your reporting responsibilities.
Determining If Your Sales Are Taxable
When selling on eBay, a primary consideration for tax purposes is whether your activity constitutes a hobby or a business. The IRS determines this distinction by focusing on whether you engage in the activity for profit. Factors include operating in a businesslike manner, the time and effort spent, dependence on the income, and expectations of future profit. The IRS does not provide a specific income threshold to differentiate between a hobby and a business.
If your eBay sales are considered a hobby, any income you earn is reported as “other income” on your tax return. Hobby expenses are not deductible from your gross income. This means you report the full amount of hobby income without reducing it by related costs.
Conversely, if your eBay sales are classified as a business, your income and expenses are reported differently. Business income is subject to self-employment taxes in addition to regular income taxes. You can also deduct all ordinary and necessary business expenses, which can reduce your taxable income.
Calculating Your Taxable Net Income
Calculating your taxable net income from eBay sales involves determining your gross sales and then subtracting allowable deductions. Gross sales are the total amount received from selling items, including the selling price, shipping charges, and handling fees collected from the buyer. You must account for all sales, not just those reported on a Form 1099-K.
The Cost of Goods Sold (COGS) is a primary deduction, including the purchase price of the items you sold. For example, if an item cost $10 and sold for $50, your COGS is $10. COGS also includes direct costs to prepare an item for sale, such as materials for handmade goods or shipping costs to acquire inventory.
Beyond COGS, many other ordinary and necessary business expenses can reduce your taxable income. Common deductible expenses for eBay sellers include eBay selling fees, listing fees, final value fees, and payment processing fees. Shipping costs to buyers and packaging supplies like boxes, bubble wrap, and tape are also deductible.
Other deductions include advertising costs, internet and phone expenses related to your business, and a portion of home office expenses if you meet IRS criteria. Form 1099-K is issued by payment processors like eBay Managed Payments if transaction volume thresholds are met. Receiving a 1099-K does not mean your income is taxable; it serves as an information report to the IRS about your gross transaction volume. All income remains potentially taxable, regardless of whether a 1099-K is issued.
Understanding Applicable Taxes
Net income from your eBay sales, if classified as a business, is subject to several types of taxes. Federal income tax applies, where your net income from eBay sales is added to any other income you earn. This combined income is then taxed at your individual marginal tax rate. The United States employs a progressive tax system, meaning higher income levels are subject to higher tax rates.
Self-employment tax covers Social Security and Medicare contributions for business owners. This tax applies to your net earnings from self-employment, which is your gross income less allowable business deductions. The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security up to an annual earnings limit and 2.9% for Medicare with no earnings limit. This tax is calculated on 92.35% of your net earnings from self-employment.
Many states also impose state income tax, and your net income from eBay sales may be subject to these taxes depending on your state of residence. State income tax rates and rules vary across jurisdictions. You will need to consider your state’s tax laws to determine your obligations.
Sales tax applies to the sale of goods and services. For most casual sellers on eBay, the marketplace facilitator, eBay, is responsible for collecting and remitting sales tax on behalf of sellers for sales made to buyers in various states. However, if you sell items off-platform or meet economic nexus thresholds in states where you do not have a physical presence, you might have direct sales tax obligations. Nexus refers to a sufficient connection between a seller and a state that creates a tax collection obligation.
Record Keeping and Reporting Your Income
Maintaining accurate records is important for any eBay seller, whether operating as a hobby or a business. Keep detailed records of all sales, including date, item, selling price, and buyer information. Also record purchases, such as receipts for items bought for resale, and documentation for all business expenses like eBay fees, shipping costs, and packaging supplies. Good record keeping helps accurately calculate income and expenses, substantiate deductions, and prepare for an IRS audit.
For those whose eBay sales are considered a business, report your income and expenses on Schedule C (Form 1040), “Profit or Loss From Business.” This form requires detailing gross receipts or sales, returns and allowances, Cost of Goods Sold, and various other business expenses. The net profit or loss calculated on Schedule C flows to your personal Form 1040.
If your business generates a net profit, complete Schedule SE (Form 1040), “Self-Employment Tax.” This form calculates the amount of Social Security and Medicare taxes you owe as a self-employed individual. The information from Schedule SE is then transferred to your Form 1040.
For individuals whose eBay sales are classified as a hobby, any income earned is reported on Schedule 1 (Form 1040) under “Other Income.” Hobby expenses are not deductible. If you expect to owe at least $1,000 in tax for the year, self-employed individuals are required to pay estimated taxes throughout the year. These payments are made quarterly to the IRS to cover income tax and self-employment tax obligations.