Whether it’s as a hobby, a side hustle or even a full-time business, selling on online marketplaces such as Depop, Poshmark and Etsy is all the rage. Of course, all income earned is income that must be reported, and that includes income made from selling goods on these bustling online shops.
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That can get a bit tricky, especially if you’re new to selling online and haven’t accounted for online selling on your tax returns in the past.Here’s everything you need to know about taxes if you sell on any of the online marketplaces.
Report All Income Made From Selling on These Platforms
As noted, any income made from selling goods on online marketplaces like Depop, Poshmark, Etsy, etc., must be reported to the IRS.
“This includes sales revenue and additional income, such as shipping fees or handling charges,” said Levon Galstyan, a CPA with OakView Law Group. “It’s essential to keep accurate records of all your sales and income so you can report it accurately on your tax return.”
Thus, it’s crucial to keep detailed records of your income and your expenses.
You Should Receive a 1099-K Form
At the end of the year, or soon after, payment sites like PayPal, Square, and Venmo may send you a tax form called 1099-K that includes information about how much money passed through its site, Galstyan noted.
This form will include both business and personal transactions, so your accurate records will be useful in tracking the money made from your business.
You’ll Report Your Info on Schedule C
Report your information on Schedule C and subtract your expenses from your income.
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“You’ll either get back what you put in, make a profit, or lose money (which can get you a tax break on your general income),” Galstyan said. “When you file your taxes, Schedule C will be your best friend. Think of it as a one-stop shop for everything that has to do with your business. After you list your income and business expenses on Schedule C, you can figure out if you made a profit by subtracting your expenses from your income. If you get a number that is less than zero, you have incurred a loss.”
You May Owe Self-Employment Taxes
If you generated over $400 selling on an online marketplace, you must pay self-employment taxes.
“Your additional income will be taxed as a capital gain,” Galstyan said. “Schedule D can be used to record capital gains.”
You May Take a Loss
If you have a loss, you may deduct that amount from your taxable income.
“You’re in luck when you sell used personal items for less than what you paid for them,” Galstyan said. “You won’t have to pay taxes on the money you make. If you sell a pair of shoes for $40 on Poshmark for $20, you don’t have to pay taxes on the $20 because it’s less than the $40 price. You don’t have to pay taxes on the money you make as long as you sell your items for less than you paid for them.”
Understand Tax Obligations
Now, here’s where things get a little less cut and dry. Your tax obligations may vary depending on your business structure.
“For example, your business income will be reported on your personal tax return if you are a sole proprietor,” Galstyan said. “If you have an LLC or corporation, you may have additional tax obligations, such as paying quarterly estimated taxes or filing a separate tax return for your business. Understanding your specific tax obligations based on your business structure is essential.”
Know Your State’s Sales Tax Laws
Sales tax laws vary by state and can be quite complex, so it’s crucial to research your state’s sales tax laws to ensure you comply.
“The selling platform you employ will typically collect sales tax and provide you with a report at the conclusion of the tax year,” Galstyan said. “As you operate online, the state where you live will get the sales tax rather than your firm’s location.”
Note that there are situations when the platform doesn’t manage sales taxes. In that case, you are in charge of obtaining the tax from your customers and remitting the funds appropriately.
Understand the Difference Between Hobby Income and Business Income
Just to make things more complicated — there is a difference if you sell on these platforms as a “hobby” versus as a “business.”
“Any income you earn is considered hobby income and is subject to different tax rules than business income,” Galstyan said, if the former is the case.
Keep Good Records
This point is worth hammering home: record all transactions, including sales receipts, invoices and even canceled checks, if those come into play.
“The American Rescue Plan (ARP Act) mandates that third-party payment platforms record any payments made through their services that total $600 or more,” Galstyan said. “Simply put, the IRS will know that money was transferred to you during the year, so any income tied to internet activity not appearing on your tax return will be detected.
So don’t worry; the following guidelines still hold true when determining whether you will be subject to taxes. Simply continue to save your receipts, and if you don’t have any, gather payment verification in any other manner you can.”
Keep Track of Expenses — You Can Deduct Quite a Few!
As an online seller, you can deduct certain expenses related to your business activities if they are applicable.
“This can include shipping costs, packaging materials and listing fees,” Galstyan said. “It’s essential to keep accurate records of these expenses so you can claim them on your tax return and reduce your taxable income.”
Note that there are several tax deductions online sellers can take advantage of. Galstyan highlighted a few of them below.
Shopping Platforms
Use Schedule C, Box 18, to write it off.
“Deduct what you pay for programs like Shopify and WooCommerce that help you run an online store,” Galstyan said.
Packaging and Shipping
Use Schedule C, Box 27a, to write it off.
“Everything you buy to ship customer orders, like bubble mailers, boxes, tissue paper, and more, is a write-off,” Galstyan said.
Supplier Costs
Use Schedule C, Box 10, to write it off.
“You can write off the fees you pay to your vendor or supplier,” said Galstyan.
Software for Email Marketing
Use Schedule C, Box 18, to write it off.
“Email marketing software like MailChimp or ActiveCampaign is also eligible for a tax deduction,” Galstyan said.
Storage
Use Schedule C, Box 20b, to write it off.
“If you preserve your inventory in a warehouse, you can write off the rent,” Galstyan said.
Online Advertising
Use Schedule C, Box 8, to write it off.
“Your ads on Facebook, Google, Instagram and other sites are all tax deductible,” Galstyan said.
Camera Equipment
Use Schedule C, Box 22, to write it off.
“You can write off any gear you use to make promotional videos, portraits, and other things,” Galstyan said.
Card Processing Fees
Use Schedule C, Box 10, to write it off.
“Your payment processors charge you a fee of about 2.75 percent, which adds up over time,” Galstyan said. “It can be deducted.”
Commissions From Platform
“Every time you sell something on an online platform, they take a cut of your money,” Galstyan said. “Those costs can be deducted.”
Platform Search Placements
Use Schedule C, Box 8, to write it off.
“Sponsored search results on Amazon, Etsy and other sites are advertising costs that can be deducted,” Galstyan said.
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This article originally appeared on GOBankingRates.com: Taxes: What To Know if You Sell on Depop, Poshmark or Other Online Marketplaces
