In recent years, Amazon has become one of the most popular e-commerce platforms globally, with millions of users worldwide. Selling on Amazon can be an excellent opportunity to start a business, make some extra income, or even turn it into a full-time career. However, many sellers are unsure about their tax obligations and whether they need to pay taxes on their Amazon sales.
The short answer is yes. If you’re an Amazon seller, you’re required to pay taxes on your earnings. Like any other business, you must comply with the local, state, and federal tax laws. This article will discuss the different types of taxes that Amazon sellers may be liable for and provide a general overview of the tax requirements for Amazon sellers.
Understanding Your Tax Obligations as an Amazon Seller
When it comes to taxes, Amazon sellers fall into two main categories:
- Professional sellers
- Individual sellers
Professional sellers are those who sell more than 40 items per month or have annual sales of $20,000 or more. Individual sellers, on the other hand, sell fewer than 40 items per month and have annual sales of less than $20,000. Depending on your status, your tax obligations may vary.
Sales Tax
Sales tax is a tax on the sale of goods or services. It is usually collected by the seller and remitted to the government. Sales tax laws vary from state to state, so it’s essential to know the laws in the states where you’re selling. As an Amazon seller, you may be required to collect and remit sales tax on your sales.
The Supreme Court’s Wayfair decision in 2018 changed the rules on sales tax for online sellers. Before Wayfair, a seller was only required to collect and remit sales tax if they had a physical presence in a state. However, the Wayfair decision allowed states to require out-of-state sellers to collect and remit sales tax if they meet certain criteria.
Now, if you sell on Amazon, you may be required to collect and remit sales tax in any state where you have economic nexus. Economic nexus means that you have a significant presence in a state, even if you don’t have a physical presence. This presence can be based on your sales volume, the number of transactions you have, or the total amount of sales you make in a state.
The sales tax rates and rules vary from state to state. Some states have flat rates, while others have complex rules and exemptions. For example, in California, the sales tax rate can range from 7.25% to 10.25%, depending on the location and the type of product you’re selling.
To collect and remit sales tax, you need to register for a sales tax permit in the states where you have nexus. Once registered, you’ll be required to collect sales tax from your customers and remit it to the state on a regular basis, usually monthly or quarterly.
Income Tax
Income tax is a tax on the income earned by an individual or business. As an Amazon seller, your income is subject to federal income tax, as well as state income tax in the states where you have nexus. The income tax rates vary based on your income level and filing status.
As an Amazon seller, you’re required to report your income on your tax return. If you’re a professional seller, Amazon will issue you a Form 1099-K, which shows your gross sales and fees for the year. You’ll need to report this information on your tax return.
If you’re an individual seller, you’re not required to receive a Form 1099-K from Amazon, but you’re still required to report your income on your tax return. You should keep accurate records of your sales, expenses, and fees to ensure that you report your income accurately.
Self-Employment Tax
In addition to income tax, as a self-employed individual, you’re also required to pay self-employment tax. Self-employment tax is a tax on your net self-employment income, which includes your Amazon sales. The self-employment tax rate is currently 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare.
If you’re a professional seller, Amazon will report your gross sales on Form 1099-K. However, you’re responsible for calculating your net income, which is your gross sales minus your expenses and fees. You’ll need to report your net income on your tax return and pay self-employment tax on that amount.
If you’re an individual seller, you’re not required to receive a Form 1099-K, but you’re still responsible for reporting your net income and paying self-employment tax.
State Income Tax
In addition to federal income tax, you may also be required to pay state income tax. State income tax rules vary from state to state, and some states don’t have an income tax. If you have nexus in a state that has an income tax, you’ll be required to pay state income tax on your net income.
Deductible Expenses
As an Amazon seller, you’re allowed to deduct certain business expenses from your income, which can reduce your tax liability. Deductible expenses may include:
- Amazon selling fees
- Shipping and handling fees
- Packaging and labeling costs
- Inventory costs
- Advertising and marketing expenses
- Office supplies and equipment
- Travel expenses
- Professional fees, such as legal and accounting fees
You should keep accurate records of your business expenses to ensure that you can claim all eligible deductions on your tax return.
Filing Your Tax Returns
As an Amazon seller, you’re required to file a tax return with the IRS each year. The type of return you file depends on your status as a professional or individual seller.
If you’re a professional seller, Amazon will issue you a Form 1099-K, which shows your gross sales and fees for the year. You’ll need to report this information on Schedule C of your tax return. You’ll also need to file Schedule SE to calculate your self-employment tax.
If you’re an individual seller, you’re not required to receive a Form 1099-K from Amazon. However, you’re still required to report your income on your tax return using Schedule C. You’ll also need to file Schedule SE to calculate your self-employment tax.
In addition to your federal tax return, you may also be required to file state tax returns in the states where you have nexus. You should check the tax laws in each state to determine your filing requirements.
Penalties for Non-Compliance
If you fail to comply with your tax obligations as an Amazon seller, you may be subject to penalties and interest. Penalties can include:
- Failure to file penalty
- Failure to pay penalty
- Accuracy-related penalty
- Fraud penalty
Penalties can add up quickly and can significantly increase your tax liability. It’s essential to comply with all tax laws and regulations to avoid penalties and interest.
Conclusion
In conclusion, if you’re an Amazon seller, you’re required to pay taxes on your earnings. Depending on your status as a professional or individual seller, your tax obligations may vary. You may be required to collect and remit sales tax, pay income tax, self-employment tax, and file tax returns with the IRS and state tax agencies.
It’s essential to keep accurate records of your sales, expenses, and fees to ensure that you report your income accurately and claim all eligible deductions. Compliance with all tax laws and regulations is crucial to avoid penalties and interest that can significantly increase your tax liability.
As an Amazon seller, you should also stay up to date with any changes in tax laws and regulations that may affect your business. For example, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. in 2018 paved the way for states to require remote sellers to collect and remit sales tax, even if they don’t have a physical presence in the state.
To comply with sales tax laws, Amazon has implemented a Marketplace Facilitator program that automatically collects and remits sales tax on behalf of sellers in states where it’s required. However, sellers are still responsible for collecting and remitting sales tax in states where Amazon doesn’t provide this service.
In addition to sales tax, Amazon sellers should also be aware of other tax considerations, such as the use tax. Use tax is a tax on the use of tangible personal property in a state where sales tax wasn’t paid. If you purchase items for your Amazon business from out-of-state vendors and don’t pay sales tax, you may be required to pay use tax in your state.
Overall, understanding your tax obligations as an Amazon seller is essential for running a successful business and avoiding costly penalties and interest. Consult with a tax professional or use online tax software to ensure that you’re complying with all tax laws and regulations and maximizing your deductions. By doing so, you can minimize your tax liability and keep your business in good standing with the IRS and state tax agencies.
