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So, you just started selling online and are looking for help with how to file taxes for your 2018 return? You’ve come to the right place!
If you’re new to eCommerce, figuring out which taxes you have to pay, when you have to pay them, and who you have to pay, can be a bit of a challenge. But taxes come with the territory for online sellers — whether you sell products on your own website or via a marketplace like Amazon, eBay or Etsy.
This guide aims to demystify taxes and make the process orderly and manageable so you can get back to what you do best — running your eCommerce business!
Read on for a breakdown of the different types of taxes you can expect to pay as an online seller. (To keep things simple, we’re going to assume that you are self-employed and have not registered your business as a corporation.)
“What makes the difference between a taxidermist and a tax collector? The taxidermist only takes your skin.” ~ Mark Twain
How to file taxes as a new online seller
This guide will cover the following main topics relevant to filing taxes if you sell products online:
We’ll talk about whether or not you’re responsible for paying the different types of taxes and, if so, how to figure out what you owe and when. We’ll also touch on some common tax deductions and Schedule C insights for new online sellers, tax filing basics, filing a tax extension, and tax tips for online sellers who use Fulfillment by Amazon. Throughout the guide, you’ll find links to resources that can help during tax time. Ready to get started?
1. Annual federal taxes
Do I have to pay federal taxes?
Unless selling online was your very first job, you’re probably familiar with filing your personal income taxes every year on April 15. It’s really no different for online sellers, whose income is considered “self-employment” income. The only difference is that, along with the usual personal income tax Form 1040, online sellers must also file a form called a Schedule C (Business Profit & Loss) to report self-employment income.
If you intend to make a profit, depend on the income, or have made money the last three out of five years, you have a business — not a hobby. You’re considered self-employed.
If your net earnings from self employment were $400 or more, you must file an income tax return. You can file your income tax return on Form 1040 and attach Schedule C. You might have heard of a “Schedule C-EZ,” which is easier to fill out. However, since you’re selling inventory online, you cannot use this schedule.
Remember: If you operated more than one business as a sole proprietorship, you must attach a separate Schedule C for each business.
You can find all the info you need to stay on the up-and-up with the IRS at the Self-Employed Individuals Tax Center.
A few numbers you need to know
Social Security Number (SSN) or Employer Identification Number (EIN): This number identifies you and must appear on each of your individual income tax forms. Any business owner can obtain an EIN, and it’s a good idea to do so to limit visibility of your SSN.
If you pay wages to one or more employees or file pension or excise tax returns, you are required to obtain an EIN. You can start your application for an EIN on this section of the Small Business and Self-Employed Tax Center.
Individual Taxpayer Identification Number (ITIN): If you are not eligible for an SSN, you might need to apply for an Individual Taxpayer Identification Number. Use the IRS’s Interactive Tax Assistant to figure out if you’re eligible to apply for an ITIN.
How much do I owe?
This is where solid bookkeeping really matters. You need to know how much money is coming in and going out from your business so you don’t overpay or underpay the tax collector.
If you overpay, you miss out on money that could have been working for you. If you underpay, the IRS will charge you a penalty at the end of the year.
But you don’t need to waste valuable hours entering numbers into a spreadsheet; there are plenty of tools that can save you time and headaches. If you use GoDaddy Online Bookkeeping, we’ll calculate your estimated taxes based on the net profit from your business — that’s total income minus expenses. The tax rate or percentage of profit you pay will increase as your business net profit increases and will also include an amount for self-employment taxes.
I received a Form 1099-K. What should I do?
If you received income of more than $20,000 from a payment processor (like PayPal, Stripe or Etsy Direct Checkout), and made more than 200 sales through that specific payment processor, then you’ll receive a Form 1099-K.
While this form is for information purposes only, be sure to verify that it’s correct. And keep in mind that the total amount on this form doesn’t account for refunds, returns or fees charged by your payment processor. It does include shipping income as gross income. All of these factors can make that number look a little strange when compared to your own books.
Don’t ignore the 1099-K. If you claim that you made less in income than the Form 1099-K specifies, be ready to prove it or the IRS could come asking questions. Form 1099-K is just another reason it’s vital that you stay on top of your bookkeeping and track every single penny of income and expenses.
Related: What’s this Form 1099-K I received?
When will I receive form 1099-K?
Payment processors are required to deliver form 1099-K to you either electronically or via mail by January 31 following the year of the transactions. For more information, check out the Payment Card and Third Party Network Transactions FAQ on the IRS website.
When do I have to pay my federal taxes?
Although the filing date for your yearly tax return and Schedule C is April 15, you are actually required to pay these taxes quarterly. We’ll cover that below.
How do I file my tax return?
To file your annual tax return, use Schedule C to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. In order to report your Social Security and Medicare taxes, file Schedule SE (Form 1040), Self-Employment Tax. You’ll use the income or loss calculated on Schedule C to figure out the amount of Social Security and Medicare taxes you should have paid during the year (more on that later).
If you use GoDaddy Online Bookkeeping, you’ll get a user-friendly report that has the information you need to plug into the tax return software of your choice or to hand straight over to your accountant.
Just be sure all of your income and expenses are entered and properly categorized before you head over to the “Taxes” tab to download your Schedule C.
When you’re ready to file your tax return, send both your tax return and your Schedule C to the same place — the IRS tax center serving your region.
Related: Calculating self-employment taxes
Filing an extension
Taxes can be overwhelming for first-time online sellers (and honestly, for experienced online sellers) — but you can get a temporary reprieve if you need more time. It’s almost painless to file a tax extension.
Just go to the IRS website to download an extension application. The extension gives you an additional six months to track down all your paperwork and file. According to the IRS:
“You can also get an extension by paying all or part of your estimated income tax due and indicate that the payment is for an extension using Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or a credit or debit card. This way you won’t have to file a separate extension form and you will receive a confirmation number for your records.”
One caution: Though you can wait until October 15 to file, the IRS still requires that you pay any taxes due by April 15 or you will risk a penalty, which is usually about 0.5 percent of the amount of taxes not paid every month.
Common tax deductions and Schedule C insights for new online sellers
Deducting startup costs
While it might not feel like it as you catalog inventory until 4 a.m., as a first-time online seller you are actually in a lucky spot when it comes to taxes. That’s because you’re considered a startup. The government gives you some extra leeway when it comes to tax deductions for startup costs.
Startup costs include “any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business.”
If you started your business in 2018 and had startup costs of $50,000 or less, you are allowed to deduct up to $5,000 in startup costs for your business on your 2018 tax return. If you exceed the $50,000 threshold, the $5,000 first-year deduction will be reduced dollar-for-dollar by the amount those startup expenses exceeded $50,000. Further, if you spent more than $55,000 on startup expenses, you won’t be able to claim the $5,000 deduction for the first year.
To learn more, see the “Business Start-up and Organizational Costs” section in this IRS publication.
Other common deductions that might benefit new online sellers
As you work through how to file taxes as a new online seller, see the resources below for information about other business expenses you might be able to deduct:
How to deduct web development costs. Different types of deductions are available for various scenarios, including: developing your eCommerce website or paying someone else to develop your site before you start your business; buying the website from someone who creates it with sophisticated programming languages; and buying a website without complex programming from a vendor. The IRS states that, in general, “you can deduct internet-related expenses including domain registration fees and webmaster consulting costs. If you are starting a business, you may have to amortize these expenses as start-up costs.”
How to deduct advertising costs. The IRS states that you “generally can deduct reasonable advertising expenses that are directly related to your business activities. … You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future.” (FYI: Lobbying doesn’t count.)
How to deduct health insurance costs if you’re self-employed. You might be able to deduct medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents if you meet the requirements for the IRS’s Self-Employed Health Insurance Deduction.
How to deduct ‘other expenses’. Among the list of “other expenses” you can include on that special line of the Schedule C are shipping costs, which are deductible as “other expenses” if they aren’t included in your Cost of Goods Sold (more on that below). It’s worth reading through the “Miscellaneous Expenses” section of Pub. 535 to make sure you’re not missing any deductions that might fit in the “other expenses” category.
Calculating the Cost of Goods Sold (COGS)
As a business that sells inventory, you are also required to calculate your cost of goods sold (COGS). If you are a reseller, these are the costs of purchasing the inventory you resell. If you make the products you sell, these are the costs that go into creating your products. Use Part III of your Schedule C to determine your business’s COGS.
A word about annual state taxes
As you know if you’ve ever moved to a new state, all states are different when it comes to taxes. Most states that have a personal income tax will also have their own version of the IRS Schedule C for self-employed income earners, and will require you to file that with your individual state return. If your state does not have an individual income tax, you might still need to check with your state’s taxing authority to find out if you owe any business taxes.
Additional resources for filing annual federal taxes
As you figure out how to file taxes as a new online seller, you can find helpful tools and more information about annual federal taxes here:
Federal Tax Calendar: This is the IRS general tax calendar, which includes the 2018 due dates most taxpayers need to know.
IRS Forms & Publications: Find and download current IRS forms, instructions and publications.
IRS Local Office Locations: Simply enter your ZIP code to find your closest Taxpayer Assistance Center.
IRS Self-Employed Individuals Tax Center: Online tax resource center for self-employed individuals.
Calculating self-employment taxes: Get tips for figuring out your self-employment taxes.
Form 1099-K, Payment Card and Third Party Network Transactions: General information and downloadable forms for Form 1099-K.
Payment Card and Third Party Network Transactions FAQ: General facts about Form 1099-K and tax reporting for payment card and third-party network transactions.
IRS Penalty Relief: General information about relief from tax penalties.
Extension of Time to File Your Tax Return: General info from the IRS about filing a tax extension, plus downloadable forms.
Links to State Taxing Authorities: Find information about doing business in your state, taxation and more.
GoDaddy blog tax posts archive: A roundup of articles related to filing taxes.
2. Quarterly estimated taxes
What are quarterly estimated taxes and when are they due?
If you’re an online seller, you might be required to pay your annual tax bill in four quarterly installments, otherwise known as quarterly estimated taxes. Many people don’t know about this requirement because they have never had to worry about paying quarterly estimated taxes until they became self-employed.
Self-employed people have to pay their taxes throughout the year. So while your filing date is April 15, you actually have to pay taxes each quarter.
Essentially, quarterly estimated taxes are designed so that you pay one-quarter of your annual taxes each quarter on April 15, June 15, September 15, and January 15 (see this IRS chart for exact dates and related information).
Why? The United States operates on a pay-as-you-go income tax system. This is why employers are required to withhold taxes from the paychecks of their W-2 employees. But if you are self-employed, nobody is withholding and remitting those taxes to the government. This means that you are responsible for that task, and you must remit taxes to the government quarterly.
How much do I owe each quarter?
Well, that’s why this is an estimate. Say you estimate that you’ll owe $10,000 in taxes at the end of the year. That means you should pay $2,500 on each of the quarterly estimated tax due dates.
If this is your first year paying taxes as a self-employed individual, you will not be penalized as long as you pay in an amount equal to what you owed in income taxes in the previous year.
How do I calculate quarterly estimated taxes?
If you use GoDaddy Online Bookkeeping, you’re in luck! This tool calculates how much you owe in quarterly estimated taxes each quarter. To estimate your quarterly taxes, GoDaddy Online Bookkeeping:
- Calculates your business’s profit year-to-date.
- Then calculates the self employment tax (which consists of social security and Medicare contributions) using the latest IRS rates.
- Adds your business income tax to the self-employment tax, using the marginal tax rate based on the profit to date.
Keep in mind that GoDaddy Online Bookkeeping gives you a conservative estimate and doesn’t take into account any other personal deductions or taxes withheld by a W-2 position you might concurrently hold while you are also self-employed.
If you use Online Bookkeeping, check the “Taxes” tab then the “Quarterly Taxes” sub-tab. This will allow you to see how much we have estimated you owe the government. Once you have entered a payment to the IRS, your quarterly estimated taxes payment will show up in your “Money Out” tab as “Estimated and Income Tax Payments.”
How do I file quarterly estimated taxes?
To pay your estimated quarterly taxes, you can do one of two things:
- You can fill out a form 1040-ES and send it to the IRS address for your region.
- You can file electronically using the Electronic Federal Tax Payment System (EFTPS).
You have to enroll in the EFTPS program and receive a code via mail before you can use it. But after you’re all set up, you can use EFTPS like an automatic debit for tax payments if you wish, and you can even pay taxes over the phone.
What if I miss a deadline?
If you’ve missed a quarterly estimated tax deadline, pay up as soon as possible. If you owe more than $1,000, the IRS wants its owed taxes paid during the year. Missing quarterly payments will result in penalties and interest (although you can file an appeal).
Additional resources for handling quarterly estimated taxes
Check out these tools and resources related to quarterly estimated taxes:
What’s the deal with quarterly estimated taxes?: An easy-to-understand overview to help you understand quarterly estimated taxes.
Estimated Taxes: IRS primer about estimated taxes.
Due dates for estimated taxes: IRS chart that shows deadlines for quarterly estimated taxes.
GoDaddy Online Bookkeeping Estimated Taxes FAQ: Learn how to use the Estimated Taxes section in GoDaddy Online Bookkeeping.
2017 Form 1040-ES Estimated Tax for Individuals: Use this form to figure and pay your estimated tax for 2018.
Electronic Federal Tax Payment System: Enroll here to pay any tax due to the IRS using the online system.
IRS Late Fees, Penalties and Interest: Information about late payment and underpayment penalties.
Penalty Appeal — Online Self-Help Tool: Start here if you need to file an appeal for a tax penalty.
3. State sales tax
What’s my state sales tax?
We’ve covered the taxes you pay on your income from self-employment, but if you’re a product seller you have a whole other set of taxes to worry about — sales tax. Forty-five states and the District of Columbia all have sales tax laws on the books. As an online seller, you are most likely required to charge a percentage of sales tax on every sale you make.
Forty-five states and the District of Columbia collect statewide sales taxes, while 38 states also collect local sales tax.
Though laws are changing rapidly, for now, U.S. eCommerce sellers only have to charge sales tax to buyers in states where they meet one or both of these criteria:
- They have physical presence nexus in the state. Nexus is legalese for “a physical presence” such as a store, office or employee. Many first-year online sellers will only have a physical presence within their own state.
- They have economic nexus in a state. Every state sets their own economic nexus threshold, and some states don’t have economic nexus. In general, if you make either /or more than $100,000 in a year in a state or more than 200 transactions in a year in that state, then you are required to collect sales tax from buyers in that state.
Not sure whether or not your business is required to collect sales tax? Contact your state’s revenue agency. Otherwise, no matter your level of sales, if you live in say, Florida, and sell to someone else who also lives in Florida, you are required to charge the buyer sales tax for that item.
State sales tax is generally anywhere from 4 percent to 8 percent on the price of the item purchased. If you sell to someone who lives in another state, and do not have any type of nexus in that state, you do not have to collect sales tax on that sale.
Pro tip: GoDaddy Online Store makes it easier to collect sales taxes. You can choose your customers’ tax percentage by country or region and, in some cases, by state or province as well. In most cases, you only need to set this option one time. Here are step-by-step instructions for configuring taxes in GoDaddy Online Store.
Combined state and average local sales tax rates in 2018
Here’s a roundup of current state and average local sales tax rates, courtesy of the Tax Foundation:
Source: Tax Foundation
Additional state taxes
Unfortunately, in some cases, you can’t just look up your state’s sales tax rate and be done with sales tax. Local areas also charge sales tax, generally 1 percent to 2 percent on top of state sales tax. Some states have an origin-based sales tax, meaning you can charge taxes based on state + local rates at the product’s origin (i.e. your location.)
Other states have a destination-based sales tax, meaning you must charge sales tax based on the buyer’s location.
To find the sales tax(es) for the state(s) in which you do business, visit sale-tax.com or consult your local government tax offices for the latest official city, county and state tax rates.
Fulfillment by Amazon sellers (FBA)
If you use Fulfillment by Amazon (FBA), your sales tax is a little different from the scenario mentioned above. Because you warehouse your goods in Amazon fulfillment centers, you technically have nexus in any state where you’ve stored goods in an Amazon fulfillment center throughout the year.
If you live in New Mexico but your goods have been stored in warehouses in Arizona and Nevada, then you are required to collect sales tax in all three states. And this rule doesn’t just apply to sales tax collected on FBA goods. If you sell in those states on any platform throughout the year, you are required to collect sales tax due to the nexus you’ve established by storing your goods in Amazon fulfillment centers.
How much sales tax do I owe?
As a merchant, you’re essentially just collecting sales tax on your sale and then holding it until you pass it on to the government. Because of this, it’s extremely important to track how much sales tax you have collected so that you don’t overpay the state and lose money, or underpay and receive a penalty.
Whenever you collect sales tax from a customer, use the “Sales Tax Collected” category and Online Bookkeeping will automatically track the total amount collected (which also means the total amount you owe.)
Now, as you are tracking sales tax collected, GoDaddy Online Bookkeeping will keep track of the total, and add it to the “Income” section of your overview page. This will provide you with an up-to-date balance of how much sales tax you’ve collected, as well as what you need to send into the state.
How do I file state sales taxes?
Depending on the laws of your state, you will likely remit sales tax either monthly, quarterly or annually. When it comes time to pay up, GoDaddy Online Bookkeeping users can simply go to the “Taxes” tab to see the amount they owe. Afterward, the sales tax paid will show up in the “Money Out” tab with the category “Sales Tax Submitted.”
To pay, remit all the sales tax you have collected within your payment period to your state’s taxing authority. Visit the same authority to find out when you should pay and if you are required to hold a permit to collect sales tax.
Additional resources about state sales taxes
If you’re selling products online, these tools and resources can help you better manage your sales taxes:
State and local sales tax rates in 2018: The Tax Foundation puts together a handy summary of state and local tax rates.
U.S. state sales tax rate chart: Compilation of state and local sales tax rates and ranges, organized by state.
GoDaddy Online Bookkeeping Sales Tax FAQs: Frequently asked questions about managing sales taxes in GoDaddy Online Bookkeeping.
Where do I pay my sales tax?: This GoDaddy help article links to each state’s tax department website.
TaxJar blog: Questions about Amazon Fulfillment Centers and sales taxes? This blog offers plenty of great answers.
Taxes are here to stay
“In this world nothing can be said to be certain, except death and taxes.” ~ Benjamin Franklin
Taxes are a fact of life. But they don’t have to be an impossible burden if you follow the one golden rule of business accounting — always keep track of your expenses. Whether you sell thrift store finds on eBay, books on Amazon, hand-crafted jewelry on Etsy, or a special one-of-a-kind product on your own website, use an accounting application to make sure you’re tracking all of your expenses. Why? Because expenses equal tax deductions at the end of the year!
GoDaddy Online Bookkeeping can make tax time easier — no accounting know-how needed. Use the time you’d spend filling out spreadsheets, doing data entry, and saving piles of receipts to focus on growing your eCommerce business.
With GoDaddy Online Bookkeeping, you’ll benefit from:
- Automated sales and expense tracking. You can import data from eBay, Etsy, Amazon, PayPal, banks and credit cards.
- Easy profit and loss tracking
- A pre-populated Schedule C.
- Reports on quarterly estimated and sales tax due.
- Ability to create, send and track customized invoices.
Ready to start saving time at tax time? Let’s go!
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