Amazon sellers may have different experiences than selling in a store, but you are still subject to taxes and it is important to figure out how to file your taxes on Amazon earnings. In the past, some online sellers have overlooked their taxes based on the difference in selling structure, which resulted in penalties from the IRS. When selling or fulfilling on Amazon, it’s best practice to keep up with your taxes on time, so you avoid any unwanted future investigation from the IRS.
This guide wil tell Amazon sellers everything they need to know about filing taxes responsibly and on time.
Who Needs to File Taxes on Amazon Earnings
IRS regulations require Amazon to file Form 1099-K for U.S. taxpayers who either:
- Have more than 200 transactions per calendar year.
- Earn more than $20,000 in unadjusted gross sales.
Amazon requires anyone who is a professional seller or surpasses 50 transactions in a calendar year to provide their taxpayer information. If you meet the requirements for Amazon to file a form on your behalf, you can provide this information easily by using Amazon’s self-guided interview process.
Ensure that all the taxpayer information you provide Amazon is concise and accurate. Making any mistakes will cause the form to not be filed, leading to auditing and penalties from the IRS.
Amazon tracks the number of transactions and gross earnings from your sales, eliminating any need for you to manually provide this information. As a result, if you meet either of the requirements you will automatically receive a form electronically, or it will be mailed to the address you provided during the interview.
Form W-8BEN, which is the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, must be submitted to Amazon for foreign sellers. This submission is required regardless of any reduced rate or exemption of withholding.
What Needs to be Reported
When filing your taxes, you must report both the gross amount per month as well as your gross annual amount you made in that calendar year. The gross amount you make per month must be provided to resolve discrepancies with information filings and regular fiscal year filings.
The gross annual amount is the total amount of money paid by buyers for your products, not just how much your products cost, in the calendar year. The total amount paid by buyers includes sales tax, gift wrapping, and shipping charges.
Sales taxes are complex, mainly due to the differences in practices from state to state, but also based on whether you sell directly on Amazon or are an FBA (Fulfillment by Amazon) seller.
Amazon sellers must collect state taxes and report them to the appropriate local government. FBA sellers collect based on the location of their warehouses and report them accordingly.
The frequency of reporting sales tax is determined by the state issuing your sales tax permit. The frequencies can be monthly, quarterly or annually.
Refunds do not affect the amount filed, since you are required to report unadjusted gross income. If you make a $100 sale with $10 shipping, the gross amount is $110. If you refund that $110 for whatever reason, the gross amount is still $110.
Adjusting the refunded amounts before filing can be considered as underreporting income and leads to harsh penalties from the IRS. In addition to unadjusted gross income, refunds are also counted in the total number of transactions.
Unlike refunds, discounts and sales are subtracted from the gross amount. The customer may not be paying the regular price for the items, but they are still paying a full amount.
What Needs to be Deducted
Selling on Amazon is a business, so in addition to reporting gross amounts received you are able to report deduction expenses as well. Deduction expenses may include:
- Administrative Expenses
- Office Supplies
- Shipping Expenses and Supplies
- Seller Fees and Merchant Fees
- Office Equipment*
*Office equipment is subject to depreciation, which is the process of taking a deduction over a specified period rather than deducting the entire amount in the year it’s purchased. This practice is used for items like computers, which have a useful life of more than one year.
There are exceptions to this such as IRC section-179 which states that you may deduct the entire amount in the year purchased. Verify with your accountant what the best practice is for you.
Keep track of your deductions throughout the year, so you can report them without having to take the time to search for them at the end of the year. Create a filing system for your receipts and POs, and file them as you get them. You can either use a manual filing system like an accordion folder, or you can use a document scanner to file all your receipts electronically. If audited, the IRS does accept electronic receipts.
Before filing your receipts, you’ll want to track and categorize them accordingly in a spreadsheet or the accounting software of your choice. At the end of the year all you must do is take your categorized expenses to your accountant, and they can deduct them on your taxes.
Keeping track of the earnings and deductions you have throughout the year reduces your chance of any errors on the reporting of your taxes. Since sellers are self-employed, there are no taxes deducted in their payroll like most employed positions, eliminating additional challenges in taxation. Nobody wants any additional audits or penalties from the IRS, so use these best practices to maintain accuracy in your filings.