PayPal and Ebay Must Report to the IRS

Buried deep in the housing act that was just passed is a provision that requires credit card processors – including companies like eBay and PayPal – to report annual gross receipts of it’s merchants to the IRS.

Credit card processors will be required to file Form 1099 for each merchant that has at least $10,000 in gross sales and 200 transactions.

Companies have until 2011 to comply with this new law.

The purpose of this new law is to raise revenue for the housing recovery package and to close the tax gap that exists.  The IRS estimates that it loses billions of dollars in tax revenue from small businesses who under-report (or don’t report) income.

While I’m worried that this new law will cause the cost of business for small and online business owners to go up (in the form of higher eBay fees, higher PayPal fees, etc.), I also think that all small business owners should pay their fair share of taxes (I pay my taxes, why shouldn’t all small business owners?).

So here are some tips to help online business owners comply with the new tax law, without paying too much to Uncle Sam:

• Treat your business like a business.  Register a business name, hire an accountant, keep good records.  The more you can do to treat your business like a business, the less likely the IRS will reclassify your business as a hobby.
• Keep separate accounts and records – have separate eBay, PayPal and checking accounts for your personal and business activities.
• Report your income!  Even if you don’t receive a 1099 from eBay, PayPal or the other companies that will be required to file one, you should still report all of your profits from your online business.
• Learn what’s deductible and what’s not deductible – you’d be surprised how many people do not deduct business expenses because they don’t know they can.
• Don’t be afraid of the home office deduction, and other deductions that have been labeled as a red flag.  Being a small business owner is a red flag, but that doesn’t mean you should go out of business, or worse, not report your income!

To read more about the new IRS rules, and how they affect online business owners, please visit Online Sellers Face New IRS Rules in today’s WSJ.

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The IRS and eBay: Tax Season Is Here

             

             

               

             

            

Ok – it’s not tax season yet, but I ran across Ina’s article, and wanted to share it, so here it is… ————————— The IRS and eBay: Tax Season is Here By Ina Steiner                 AuctionBytes.com                 April 03,  2005

It’s that time of year – April 15 is looming. As if I wasn’t already thinking about it, the Associated Press ran an article about eBay sellers and whether they were required to report eBay income on their taxes. How do you know if you are required to report eBay income in your taxes? Barbara Weltman, publisher of the "Big Ideas for Small Business" newsletter and author of several books, including, "J.K. Lasser’s Small Business Taxes 2005," said the rule as the tax law states it is that you have to report all income from whatever source derived. However, an eBay sale may not be income. She explained that if you purchased a designer dress for $1,000 and sold it on eBay for $200, that is a loss. Whether your eBay selling is a hobby, and the frequency of your sales, doesn’t matter, Weltman said. Whether it is income or not is what matters. Weltman said eBay sellers who do not report their income are missing out on opportunities. It’s the right thing to do, and the law, but in addition to helping you sleep at night, reporting income allows you to report expenses, like Internet access fees and all expenses related to eBay selling. There may be an opportunity to take a home office deduction, she said. And, if you show a profit, you can put money in a retirement plan. Some people are concerned that eBay is cooperating with the IRS, making it easier for the IRS to come after Powersellers. eBay spokesperson Chris Donlay said, "The IRS would need to provide us with a subpoena for a specific individual before we would provide any data. I don’t believe this is something that would be typically done for a routine audit, though it theoretically could happen." He said this is true for both eBay and PayPal. Where do you learn how to report eBay income on your taxes? Weltman suggested IRS Publication 334, "Tax Guide for Small Business" (http://www.irs.gov/pub/irs-pdf/p334.pdf). She said her newsletter and book, "JK Lasser’s Small Business Taxes 2005" (http://www.amazon.com/exec/obidos/ASIN/0471683825/auctionbytescom) can also help. If you have questions, talk to a tax professional. Additional resources are listed below. IRS Industry/Profession pages (IRS said they will be adding a section on online auctions): http://www.irs.gov/businesses/small/industries/index.html "Taxes Part One: Do I Have to Report My Auction Earnings?" By Mike Batsimm http://auctionbytes.com/cab/abu/y201/m03/abu0033/s03 "Taxes Part Two – How Do I Report My Auction Earnings?" By Mike Batsimm http://www.auctionbytes.com/cab/abu/y201/m03/abu0034/s05 IRS Section for Small Businesses and Self-Employed http://www.irs.gov/businesses/small/index.html Is it a Business or a Hobby? http://www.irs.gov/businesses/small/article/0,,id=99239,00.html Publication 535 (2004), Business Expenses http://www.irs.gov/publications/p535/index.html Recordkeeping http://www.irs.gov/businesses/small/article/0,,id=98575,00.html IRS Forms and Instructions http://www.irs.gov Ernst & Young Tax Guide 2005 http://www.amazon.com/exec/obidos/ASIN/1593150199/auctionbytescom eBay Radio Interview with Barbara Weltman, August 2003 (Scroll down) http://www.wsradio.com/ebayradiobytopic/businessadvice.htm eBay Radio Interview with Barbara Weltman, March 2005 (Scroll down) http://www.wsradio.com/ebayradio/march2005.htm UK Article: "Taxman has sights set on eBay traders" http://business.timesonline.co.uk/article/0,,9559-1419932,00.html "Australian Tax Office Investigates eBay PowerSellers" http://www.auctionbytes.com/cab/abn/y04/m09/i16/s01

            
         
       
       
      

 
   
 

 

About the author:

Ina Steiner is Editor of AuctionBytes.com and author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). She has a background in marketing and research in the high-tech and publishing fields. If you have story ideas, comments or questions, send them to ina@auctionbytes.com.

Do You Pay Taxes On eBay Income?

Another great article on eBay and taxes from Tim Knox…

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Do You Pay Taxes On eBay Income?
By 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
Entrepreneur, Author, Speaker, Radio Host
Check Out Tim’s New Radio Show! =>http://www.timknoxshow.com
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http://www.timknox.com/amazon/

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