💵Federal Taxes

Taxes: nobody likes ‘em but most of us have to pay ‘em. Today, we’re going to learn how to reduce your tax liability and make tax season less of a headache.

Heads up! This guide is intended for U.S. based sellers.

Basics of Federal Taxes

• Most CommerceNavigator users are either sole proprietors (this is the default if you haven’t filed any paperwork otherwise) or single-member limited liability corporations (LLCs).

  • If you have another type of business organization, you likely work with a tax professional and most of this information is probably not particularly useful to you.

• Each year, taxpayers file a form 1040, along with the accompanying forms. For sole proprietors or single-member LLC holders, you’ll likely file a schedule C (a profit or loss from business form) for your business.

• With the American Rescue Plan act passed during the COVID-19 crisis, small online businesses are being forced to figure out our tax situations. If you’re an online seller who is consistently making sales, even if they’re just in small amounts, the government is going to make sure they get their fair share.

1099-K

• A 1099-K is a form issued by third-party transaction networks (such as eBay Managed Payments, Amazon Pay, PayPal, or Stripe) to sellers who complete transactions over a certain amount during a tax year. You will be sent a copy of the 1099-K form the January after the year when the transactions take place from each transaction network. (For example, 2022 transactions will result in a 1099-K being issued in January of 2023.) The IRS will also receive a copy of the 1099-K.

• While the threshold since the 1099-K’s inception has been $20,000 in sales on a particular network and at least 200 sales, this is all changing beginning with sales in 2022, with forms issued in January of 2023. Starting in 2022, sales over $600 on a single payment network will typically result in a 1099-K being issued.

• While receiving a 1099-K doesn’t necessarily mean that you owe taxes or must file a tax return, it is pretty likely. The IRS will also receive this information and will know if you should be filing, but don’t.

• You could also owe taxes even if you don’t receive a 1099-K.

Schedule C

• A Schedule C is a document attached to your Form 1040, the main page most people file with their taxes.

• You'll use the Schedule C to report income or loss from a business. The IRS maintains that an activity qualifies as a business if:

  • Your primary purpose for engaging in the activity is for income or profit

  • You are involved in the activity with continuity and regularity

• The Schedule C will ask you to calculate your gross income and total expenses. By subtracting your expenses from your income, you'll determine your net profit or loss, which will be used to calculate additional taxes.

• There are 23 expense categories on the Schedule C. With CommerceNavigator's Schedule C worksheet, we'll track your transactions and automatically calculate what you've spent in each category.

  • At tax time, you can provide this worksheet to your tax professional or use the calculations to complete your own taxes. This will make things a whole lot easier and save on headaches.

Self-Employment Taxes

• Self-employment tax is a tax consisting of Social Security and Medicare taxes that applies to people who own their own businesses.

• When you work for an employer and receive a W2, employers calculate Social Security and Medicare taxes, often automatically taking a portion out of your paycheck. However, those who are self-employed figure and pay self-employment tax themselves.

• The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare.

• You must generally pay self-employment tax if your net earnings (gross income minus expenses) from self-employment were $400 or more.

Business vs. Hobby

• If you’re here as a member of the CommerceNavigator community, chances are you are running a business. However, if you’re unsure of what exactly your e-commerce “project” is qualified as, read on.

• According to the IRS, “A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.” So, if you’re flipping for fun and in limited quantities, then it’s probably a hobby. If you’re consistently flipping to make a profit and going out in search of inventory, you’re probably running a business.

• Realistically, having a business is oftentimes better than claiming that you have a hobby, as you’ll qualify for several tax deductions. Even if you think your business shouldn’t be subject to taxes, the IRS may have other ideas, especially if you receive a 1099-K.

• If you’re just selling a limited amount of personal goods from your home, you may not need to file taxes as this could just be a hobby and not a true business, but as always, check with a tax professional if you aren’t sure.

SSN vs. EIN

• Most U.S. sellers have their own Social Security numbers (SSN) or Individual Taxpayer Identification Numbers (ITIN) to pay taxes and receive forms such as a 1099-K. These are personal numbers that are not business related. As a sole proprietor, by default, you’ll be identified by this number.

• An EIN, or employer identification number, is something you can apply for from the IRS, even if you aren’t an employer. This number is simply another way to be identified as a business and can add legitimacy to your operation. Some businesses and banks may require an EIN to do business with you. Getting an EIN will generally not change your tax liability, but should be included on your Schedule C when you file taxes.

Our lawyers want you to know: while we're pretty proud of our team here at CommerceNavigator, we aren't acting in an official capacity as your CPA or attorney. We provide general information for educational purposes, not specific or professional advice. Since every situation is unique, you may want to consult with the appropriate experts for accounting, legal, and business issues.