If you regularly sell items on eBay, you might be confused about your tax obligations. Although such activity is undoubtedly commercial in nature, you might not know how you're required to categorize the earnings that it produces. Before you file your taxes, you should talk to a seasoned tax professional to determine how best to classify your eBay earnings. Ultimately, type and amount of tax that you'll pay will depend upon several factors. If you make your living on eBay, it's important that you understand how these factors interact with one another.
If you're not a habitual eBay user, your tax situation is likely to be fairly straightforward. Although you'll still have to keep accurate records of the proceeds from your sales, you won't have to file any additional paperwork with the IRS. In fact, you won't even need to report the proceeds from your eBay activities unless they exceed $600 in a given tax year. If your profits remain under this limit, you can effectively ignore them.
If you earn more than $600 on eBay in a single tax year, you'll need to keep precise track of your earnings. It's unlikely that eBay will send you a tax form that catalogs these earnings. After all, eBay is merely a platform that individual vendors use to hawk their wares. Despite the fact that the company circumscribes your activities on its site and maintains the power to revoke your membership, no employer-employee or contract-based relationship binds you to one another. As such, it has no obligation to assist with your taxes.
Most seasoned eBay sellers maintain standardized ledgers and adhere to so-called "Generally-Accepted Accounting Practices." If you earn the bulk of your income on eBay, you should do the same. Since the IRS audits self-employed individuals and small business owners far more often than members of the general population, it's likely that you'll eventually face a stressful run-in with the federal tax authorities. When this occurs, you'll need to be prepared for it.
Once you're ready to file taxes on your eBay earnings, you can choose from several different tax-filing methods. If eBay is your primary source of income, you may wish to file as a self-employed individual. In this case, you'll be responsible for covering your payroll taxes in addition to your regular income taxes. If you wish to earn certain business-related tax breaks, you can also incorporate as a sole proprietorship or S-corporation.