Tax (Photo credit: 401(K) 2013)

Many people start an online business with some confused idea that they’ll be able to keep the income “under the table” and not pay taxes on it. This is never the case. According to the IRS, you must report any income made and that includes income from internet marketplaces eBay, Etsy or even Craigslist. Both the sites themselves and payment processors such as PayPal also do some reporting to the IRS and the debate rages daily on how that will increase in the future. Even as the system operates now, most SAs find themselves becoming Top Rated or PowerSellers based on the volume of items that they sell for other people which tells anyone who looks at your account that you are making at least $12,000 a year.

The income you make from online sales is too public to hide. You’re just asking for tax penalties and audits. But that’s actually fine.

That instinct to hide your income from the government is misplaced. You’re only thinking about dodging income tax while missing the bigger picture. Registering as a business will actually save you money on taxes in the long run and help you keep more of your profits. Regardless of the size of your business, be it part time or full time, there are several big advantages to registering your SA services as a business.

  • Businesses are allowed to claim more expenses then private citizens can on their personal taxes. All the packing supplies (boxes, bubble wrap, tape, etc), marketing materials (flyers, postcards, PPC ads, etc), fees (selling fees, eBay Store subscription, PayPal fees, website or domain name hosting, etc) and other purchases you make for the business are taken into account before you report your income. In addition to the obvious purchases, a business can also claim less obvious expenses such as the cost of your digital camera, desk chair, dedicated phone line, computer, clothing you wear for client meetings, and even a percentage of your household bills and mortgage, provided these expenses occurred within the year that you are reporting.
  • The income you report to the government takes your expenses into account. When reporting your income as a private citizen, if you took $5,000 of income in from eBay, that is what you’d have to report even though $2,000 may be the cost of start-up and supplies. When reporting as a business, you would only be taxed on the $3,000 of actual income and not the expenses. In turn, as a SA, if you sell a vintage clock for $1,000 on Etsy, based on your sales record, it looks like you just made $1,000. If you were selling that item for a client at a 20% commission you really only made $200 with the other $800 going to the client, PayPal and Etsy for fees. With a registered business, it’s easier to keep a paper trail of that transaction to prove you should only be taxed on the $200, not the full $1,000.
  • Extra tax incentives exist for businesses that don’t for individuals. There’s no tax break just for being a woman but there are many tax breaks and other incentives for female owned companies. The same applies for businesses run by minority groups and for business that operate out of areas that are trying to court small business. Research the programs in your state and you may be surprised at the ways businesses get extra help where individuals don’t.

There are some other challenges to tax reporting if you report as a private citizen. As soon as you make greater than $1,000 for the year, you should talk to your tax professional and start making quarterly estimated tax payments. As eBay income has nothing withheld, in many states, you will face a penalty on your year-end income taxes if your profit exceeds $1,000. For more information on when you may need to consider filing your taxes quarterly to avoid paying a penalty, consult with your accountant and visit the official IRS website at http://www.irs.gov.

If you don’t currently have an accountant, now is an excellent time to find one. Many will give you a free consultation as long as you agree to give them your business come tax time. While you can certainly do your own business taxes, having a professional do it at least for the first year is a good idea.