Pinterest Stumbleupon Whatsapp
Ads by Google

If you clicked through to this article, you probably fall into one of two groups: either you sell your used goods on sites like eBay and Craigslist every once in a while or you conduct multiple sales per day as a way to boost your income.

In both cases, it’s possible that a portion of the money you make needs to be declared for income tax, especially if you fall into the latter group — but even one-off sales may count. Not reporting could lead to an IRS audit for tax fraud How to Stay Safe from Tax Fraud This Tax Season How to Stay Safe from Tax Fraud This Tax Season Tax fraud is on the rise, and filing your taxes online makes you a target. What can you do to make sure that you aren't the victim of tax fraud this year? Read More .

Here’s a crash course on when you need to pay taxes on eBay and Craigslist sales and how to go about it. This post was written with U.S. tax laws in mind and may not apply if you live elsewhere.

Which Sales Count Towards Taxes?

The general rule of thumb is that if you made any profit on a sale, then it must be reported as income. Profit is defined as the difference between what you paid to acquire something, any loss in value due to depreciation, and how much you sold it for.

So, for example, if you purchased a tablet or smartphone for $200 and sold it a week later for $250, then you’ve made a profit. However, if you bought a tablet or smartphone for $200 a few years ago and sold it just now for $100, then there’s no profit.

tax-online-sales-devices

Ads by Google

The IRS has a few guidelines for taxes on goods sold online. Here are the key points you should know, but we recommend reading the whole page when you can.

What it really comes down to is whether your online sales are defined as a business or a hobby — not according to your own definitions, but according to the guidelines set out by the IRS.

The main difference is that a business is for-profit while a hobby isn’t, but the waters can be a bit murky here. As such, the IRS has put forth several questions that may help to clarify where you stand:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

If you can answer “yes” to any of those questions, then you are most likely conducting a business in the eyes of the IRS. The more questions you can answer “yes” to, the more likely it is to be a business.

The distinction between business and hobby is important because some tax actions, such as deducting business expenses, are only available to one and not the other.

tax-online-sales-apps

And just to be clear, even though the title of this article mentions only eBay and Craigslist, these tax guidelines apply regardless of how you actually make your sales — whether you’re selling stuff on Amazon Here's Why You Need To Be Selling Your Handmade Crafts On Amazon Here's Why You Need To Be Selling Your Handmade Crafts On Amazon The launch of Amazon Handmade provides a huge opportunity to the users and makers of Etsy. Here's the reasons why. Read More or even if you’re selling to friends on Facebook Selling Stuff On Facebook: Everything You Need To Know Selling Stuff On Facebook: Everything You Need To Know With Facebook, we can take to the Internet, raise our For Sale signs high, and proclaim "Yes! I do want your money for this toaster with an unpredictable short in the cord!" Before you decide... Read More .

You may also need to pay sales tax on items you sell online. Unfortunately, sales tax is far more convoluted than income tax and it would be impossible to cover it all in one post, so refer to this guide to internet sales tax in all U.S. states.

How Much Do You Owe in Taxes?

The first thing you need to do is keep good records. You should always be able to peek at some kind of transaction report (or at the very least a transaction history) and sum up how much you made in sales over any given period of time.

You’ll need this information to determine how much you truly owe in taxes, and in the event you’re ever audited by the IRS, such records will save you lots of time, energy, and pain. 1099 forms are great, but you should still keep independent records.

If you’re handling lots of sales and feeling overwhelmed, consider using accounting software for small businesses 5 Ways Xero Can Help With Your Finances 5 Ways Xero Can Help With Your Finances Accounting can be confusing, time-consuming, and (if you have to pay a professional accountant) expensive. Read More .

And yes, you still owe taxes even if you never receive 1099 forms from eBay, Craigslist, Paypal, or wherever else. It’s your responsibility to track your sales and pay your rightful due.

tax-online-sales-1099

The next question is how much you owe.

If you’re selling on sites like eBay and Craigslist, then whatever income you generate from those sales will most likely be subjected to two taxes: income tax and self-employment tax.

Income tax is a bit tricky because the brackets depend on your filing status and they can change from year to year. Fortunately, you can just use MoneyChimp’s Income Tax Calculator to see what you owe given a certain amount of taxable income.

Self-employment tax is more straightforward but comprised of two parts: Social Security and Medicare. In 2015, for the self-employed, the Social Security tax rate was 12.4% on the first $118,500 of income and the Medicare tax rate was 2.9% on all income.

You must pay both income tax and self-employment tax on income earned through self-employed means, including sales made online.

tax-online-sales-self-employed

So, for example, if I sold $10,000 worth of goods on eBay in 2015 and filed taxes as Married Jointly, then I would owe approximately $1,240 to Social Security and $290 to Medicare (actually less, if you include deductions and exemptions).

Be sure to check out the IRS’s Self-Employment Tax Center page.

A bit overwhelming, isn’t it? That’s why we highly recommend using tax software 6 Best Free Tax Software to File Your Next Return 6 Best Free Tax Software to File Your Next Return If you're tired of paying to file your taxes, you'll love these six free options for filing your state and federal forms. Read More when it comes time to file your tax return. You’ll probably have to pay a bit more for a version that can handle self-employed income, but the savings in time and effort are worth it.

Don’t Forget About Quarterly Payments!

There’s one more thing to worry about when dealing with self-employed income: you have to make quarterly estimated payments to the IRS.

As an employee working for an employer, a portion of every paycheck gets taken out as a “tax withholding” — these are payments made to the IRS so that they have revenue over the course of the year.

Self-employed income is subject to the same “over the course of the year” payments, except these payments only need to be made once every quarter and they only need to estimate the tax you owe on the self-employed income you earned during that quarter.

Quarterly estimated payment deadlines are:

  • Q1 April 15 (for income in January to March)
  • Q2 June 15 (for income in April to May)
  • Q3 September 15 (for income in June to August)
  • Q4 January 15 (for income in September to December)

If the day falls on a weekend or holiday, then the due date is postponed to the next business day.

tax-online-sales-irs-direct-pay

The easiest way to pay these quarterly estimated payments is to use the IRS website’s online payment portal, which is just one of many useful online tools provided by the IRS 7 IRS Website Tools That Could Save You Time And Money 7 IRS Website Tools That Could Save You Time And Money Here are a few online IRS tools for U.S. citizens diligently slaving away over their taxes. They make your job a lot easier. Don't give up just yet. Read More .

  • Visit irs.gov on a secure computer.
  • Click Pay Your Tax Bill.
  • Click IRS Direct Pay.
  • Click Make a Payment.
  • Under “Apply Payment To,” select 1040ES.
  • Under “Reason for Payment,” select Estimated Tax.
  • Select the tax year and click Continue.
  • Fill out your taxpayer details and click Continue.

That’s it! Whatever payments you make in this way will count as a kind of “self-employed withholding” towards the total tax that you owe at the end of the year.

Do not skip out on paying quarterly estimated tax, because you will have to pay interest on whatever you still owe to the IRS when tax day comes around.

When in Doubt, Seek a Professional

This is all admittedly very confusing, especially if you’ve never had to deal with self-employed taxes of any kind. However, the point is this: you do owe taxes on all sales made through sites like eBay and Craigslist with the intention of profit.

If this is too much for you to wrap your head around, don’t worry. You aren’t the only one who feels that way, which is why so many people defer their taxes to a Certified Public Accountant (CPA). When in doubt, do that.

In the meanwhile, check out these tips on how to improve eBay sales 11 Critical Tips On How To Sell More On eBay 11 Critical Tips On How To Sell More On eBay eBay is one of the top 10 most trafficked sites on the entire Internet, so it's no wonder that when that pang of consumerist desire hits us, we head straight to eBay. Auctions can be... Read More and these other tips for making more money on eBay How to Make More Money Selling on eBay How to Make More Money Selling on eBay To maximize your earnings on eBay, you need to take a number of factors into account; we'll walk you through the best way to get the most out of your auctions. Read More .

Does this make you less enthusiastic about selling goods online? Share your self-employed tax experiences with us in the comments!

Image Credits: Smartphone on Laptop via Shutterstock, Shopping Apps via Shutterstock, 1099 Form via Shutterstock, Self Employment via Shutterstock.

  1. Zhong Jiang
    July 14, 2016 at 11:27 pm

    How about sales tax when you're purchasing products? Is this deductible from your taxes?

    • fcd76218
      July 15, 2016 at 9:26 pm

      Yes, it is but you have to keep the receipts as proof.

      New York has a standard sales tax deduction based on your Adjusted Gross Income. see line 59 on form IT-201. Instructions for filling out line 59 are on page 26 of Instruction Booklet IT-201-1.

      Federal - see line 6 of Schedule A. There may be some instructions in Publication 17 or there may be a separate Publication for General Sales Tax on the IRS site.

  2. Colin
    July 14, 2016 at 2:21 am

    In Canada, not 100% sure, but you are also suppose to remit sales tax on items that you buy online and do not charge you the sales tax. Remind me to get around to that some day.

    • Joel Lee
      July 26, 2016 at 4:13 pm

      Yeah I'm not sure about Canada but some states in the U.S. require sales tax on items sold online if the business operates out of that state, or something like that. Will need to look it up on a state-by-state basis. Thanks for mentioning, Colin.

  3. Howard A Pearce @HAPLibertarian
    July 14, 2016 at 1:01 am

    Yes, legalized state-theft is everywhere. In PA in places your have to pay a Business Privilege Tax of 3 %

Leave a Reply

Your email address will not be published. Required fields are marked *