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.
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.
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.
- If you’re selling things that you’ve owned for a while, such as a comic book collection, then there’s likely no profit involved and you’re fine. This is akin to holding a garage sale, except online.
- If you’re selling something you’ve produced, such as hand-made crafts and artwork, then it’s reportable income.
- If you’re buying and reselling online, such as gadgets on Craigslist, then it’s reportable income.
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.
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 or even if you’re selling to friends on Facebook.
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.
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.
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.
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 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.
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.
- 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.
Does this make you less enthusiastic about selling goods online? Share your self-employed tax experiences with us in the comments!