The rise of online marketplaces like Etsy, eBay, and Poshmark continue to grow in popularity and number of sellers — and for good reason. You may already know firsthand that reselling items like clothing, collectors’ items, records, and designer bags can be a fun and relatively easy way to put some extra money in your pocket. But did you know that those vintage concert t-shirts you sold last year may carry tax implications? Here’s what you need to know about filing your taxes if you’re earning income from reselling items online.
Business venture or hobby?
How serious are your selling skills? The first thing you need to do is identify whether you’re running a business or capitalizing on a hobby because the difference could save you money on your taxes. Expenses associated with running a business can be tax-deductible, but expenses associated with a hobby are no longer tax-deductible.
If you are engaging in online sales only occasionally and your intent is not to make a profit or engage in selling on an ongoing basis, the IRS may look at your online selling business as a hobby. If this is the case, you would claim the income as hobby income, however, you would no longer be able to deduct the hobby expenses as a result of tax reform since hobby expenses that were considered miscellaneous itemized deductions prior to 2018 were eliminated.
If you are actively involved in your online selling business and it is ongoing with the intent to make a profit, then it could be viewed by the IRS as your own self-employed business. In this case, you would claim the income as self-employed income, but you would also be able to deduct any expenses directly related to your online selling lowering the taxes you pay on that income.
Are your online sales similar to the occasional neighborhood yard sale? According to the IRS, you don’t need to claim them when reselling items that you’ve been using over the years for less than you purchased them for. You also can’t claim the loss from this type of sale.
With great success comes great income tax
So, you took a look at your online boutique business and realized that because you were engaged in an ongoing sales business to make a profit, your business qualifies as a legit self-employed business. Congratulations on being your own boss!
While you’re indeed running your own business, you may still be questioning whether your online boutique is big enough to pay income tax. A simple rule of thumb is you are required to file your self-employed income if your net income from your self-employed work is $400 or more. This threshold amount is where your net business income is subject to self-employment tax at 15.3 percent.
Your net business income will be claimed on Schedule C (or Schedule C-EZ), and your self-employment tax will be calculated on Schedule SE. Your information from your Schedule C will flow through to your personal tax return.
Mastering self-employment taxes
Keep in mind that self-employment tax includes Social Security and Medicare taxes — the percentage that would normally be withheld from your paychecks if you were an employee (7.65 percent), plus the percentage your employer would have contributed (7.65 percent). Running an online business, selling items for profit, and receiving your own paycheck without an employer will make you susceptible to paying a self-employment tax on your net income.
Not to worry, though — paying this tax is easy and simple to report as part of your individual tax return. The more business expenses you claim, the lower your net self-employment income. And if you use TurboTax Self-Employed, it will also automatically calculate your self-employment tax based on your net profits — it’s that easy! If you have questions, you can also connect live via one-way video to a TurboTax Live Self-Employed CPA or Enrolled Agent with an average of 15 years of experience to get your questions answered. A TurboTax Live Self-Employed CPA or Enrolled Agent is available in English and Spanish and can also review, sign, and file your tax return.
Navigating the world of sales tax
When selling your items online, paying sales tax is dependent on where you live. If the state you live in and sell items from imposes a sales tax, you will collect and pay sales tax on your earnings within that state. However, given the online market today, it’s likely that you’re selling to customers living outside your state of residence, so you may also need to collect sales tax from your online customers and submit it to those states as a result of a June 2018 court ruling. Each state has its own rules typically based on sales thresholds.
Keep calm and sell on!
With these tips in mind, you can run not only a successful and lucrative online boutique but have fun while doing so. Happy filing and selling!
RELATED: 8 Surprising Tax Deductions You Don’t Want to Miss This Year
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