If you’re reading this article, you’re probably in one of two groups: you sell used goods on sites like eBay and Craigslist every once in a while for extra spending cash OR you sell self-made goods every day as a side job to boost your income.
In both cases, a portion of the money you earn needs to be declared for income tax, especially if you’re in the latter group—but even one-off sales may count. Not reporting sales could lead to an IRS audit for tax fraud.
Here’s a crash course on when you need to pay taxes for online sales and how to go about it. This post was written with US tax laws in mind and may not apply elsewhere.
Which Sales Count Toward 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.
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 of $50. 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:
- 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 according to the definitions set out by the IRS. 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 that you’re running a business, at least in terms of taxes.
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.
You may also need to pay sales tax on items you sell online. Unfortunately, sales tax is far more complicated than income tax, and it would be impossible to cover it all in one post. Refer to this guide to internet sales tax in all US states.
And to be clear, even though the title of this article mentions only eBay and Craigslist, these tax guidelines apply REGARDLESS of where you actually make your sales—whether you’re selling stuff on Amazon or even selling to friends on Facebook.
How Much Do You Owe in Taxes?
The first thing you need to do is keep good records. You should always have access to some kind of transaction report (or, at the very least, a transaction history) and be able to 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, these records will save you lots of time, energy, and headache. While 1099 forms are great, you should still keep independent records.
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 the taxes you owe on those sales.
Note: If you’re handling lots of sales and feeling overwhelmed, consider using accounting software for small businesses.
Understanding Income Tax vs. Self-Employment Tax
If you’re selling on sites like eBay and Craigslist, then whatever income you generate from those sales will 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 2019, for the self-employed, the Social Security tax rate is 12.4% on the first $127,200 of self-employed income and the Medicare tax rate is 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.
For example, if I sold $10,000 worth of goods on eBay in 2019 and filed taxes as Married Jointly, then I would owe $1,240 to Social Security and $290 to Medicare (actually less if you include deductions and exemptions, but you won’t know until your file your tax return).
Note: 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 energy are worth it.
Don’t Forget About Quarterly Tax 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.
Normally, 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 on your behalf over the course of the year, and these withholdings count toward the total tax you’d owe at the end 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 earned January to March)
- Q2, June 15 (for income earned April to May)
- Q3, September 15 (for income earned June to August)
- Q4, January 15 (for income earned September to December)
If the day falls on a weekend or holiday, then the due date is postponed to the next business day.
How to Pay Quarterly Estimated Tax
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 Make a Payment.
- Click Direct Pay.
- Click Make a Payment.
- Under “Reason for Payment,” select Estimated Tax.
- Under “Apply Payment To,” select 1040ES.
- 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 a penalty on whatever you still owe to the IRS when tax day comes around.
When in Doubt, Seek a Tax Professional
This is all admittedly 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 earning a 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 tax preparation to a Certified Public Accountant (CPA).