Small Business Q&A with Tim Knox
Q: I read your last column about paying income tax on eBay sales
if you are doing it as a business, but as someone who only sells
on eBay occasionally I'm still confused if the IRS rules apply
to me. Can you tell me more?
Norman L.
A: Last week's column on whether you were required to report
income earned from eBay sales to the IRS sparked a number of
additional questions and comments from eBay sellers who were
hoping that I could somehow validate that their eBay activities
were mere hobbies instead of actual businesses and therefore not
susceptible to IRS taxation.
Several folks argued that just because their little eBay hobby
generated a little cash, that didn't make it a full blown
business. It seems they consider the income from their little
hobby to be financial manna from Heaven and thereby not taxable
by earthly tax collectors. I've always been amused by folks
who try to impress me with talk about their "little side
business" but when the subject turns to taxes they suddenly
refer to it as "my little hobby."
All kidding aside, the conclusion that I came to after reading
each email was always the same: while you may think selling on
eBay is just a fun pastime and the money you're making is not
reportable as income, depending on the circumstances, the IRS
would probably disagree with you.
It seems that everyone likes making money, but hates carving
off a piece for good old Uncle Sam. Welcome to free enterprise,
folks. If you're going to come to the dance you have to pay
the fiddler.
The IRS rules are clear: you must pay taxes on all personal
and business income and that includes money you make selling
on Ebay.
In its most basic sense, the IRS rules can be interpreted to
mean that if you buy an old vase at a garage sale for $10 and
sell it on eBay (or elsewhere) for $20 you made a $10 profit
and therefore must report it as income and pay Uncle Sam his
fair share.
In reality, if you are a casual seller who only sells a few
items on eBay every now and then it's doubtful the IRS is going
to let loose an army of agents to collect taxes on the few bucks
you make. However, if you consistently sell on eBay the IRS
may deem your activities to be business oriented and you will
be required to file a Schedule C and claim the income.
As mentioned last week, the IRS uses a number of factors to
determine if an eBay hobby that generates sales revenue is
actually a business.
These factors include:
- Do you carry on the hobby in a business-like manner?
- Do you spend considerable time working on the hobby?
- Do you depend on income from your hobby for your livelihood?
If the answer to any or all of these question is yes, you're
running a business, not carrying on a hobby, and you are
responsible for paying taxes on your income.
What's eBay's take on all this? Naturally eBay is vehemently
opposed to anything that might rock the eBay boat. eBay does
not does not issue 1099 tax forms to sellers, nor does it report
seller's sales figures to the IRS.
Ebay considers itself merely to be a facilitator, meaning that
they provide a marketplace in which buyers and sellers come
together to do business.
Furthermore, under it's current system it would be impossible
for eBay to issue accurate 1099s to sellers. eBay does not
track if a seller actually gets paid by the buyer, so eBay has
no idea how much money - if any - actually changes hands at
the end of each transaction.
On the bright side, if you do sell on eBay as a business you
can deduct a number of business expenses, including the cost
of inventory, listing fees, shipping, envelopes, packing
materials, etc.
You might also be able to deduct things like the purchase of a
computer for business use, office space (even if it's a home
office), office supplies, and more.
Talk to your accountant if there's any doubt as to whether
you should or should not be paying taxes on your eBay earnings.
Here's to your success!
Tim Knox
tim@dropshipwholesale.net
For information on starting your own online or eBay business,
visit http://www.dropshipwholesale.net
About the Author
Small Business Q&A is written by veteran entrepreneur and
syndicated columnist, Tim Knox. Tim serves as the president and
CEO of three successful technology companies and is the founder
of DropshipWholesale.net, an online organization dedicated to
the success of online and eBay entrepreneurs.
Related Links:
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http://www.30dayblueprint.com
http://www.timknox.com