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Posts Tagged ‘Kristine McKinley’

Taxes eBay Sellers Are Responsible For

Wednesday, September 19th, 2007

There are three types of tax that you will be responsible for when you start your eBay business. They are 1) sales and use tax, 2) payroll tax and 3) income tax.

Sales and use tax
Just about every state, and many cities and other local authorities, imposes a sales tax on items sold. Each state has different rules, so it’s important to find out the rules in your state and city. As an eBay seller, you are responsible for collecting and remitting the proper sales tax to the state you live in. You are also responsible for preparing and submitting a report detailing the amount of your sales and the sales tax collected.

You may also be subject to use taxes. This is taxes on goods you purchased out of state that you did not pay sales taxes on. The use tax generally applies to items purchased out of state which would have been subject to sales tax if the purchase transaction had taken place in state. The use tax came about from the concern that purchasers could avoid paying a state’s sales tax by making their purchases outside the state.

Payroll tax
The second type of tax that you are responsible for as an eBay seller is payroll tax. If you hire employees to help you with your eBay business, you are required to withhold federal income taxes, Social Security and Medicare taxes, and state income taxes. These taxes must be submitted to the proper tax authorities on a periodic basis (usually quarterly). In addition you must pay unemployment insurance and workers’ compensation on all employees.

If you operate your business as an S or C Corporation, you will need to setup payroll for yourself, and remit payroll taxes on your own salary. If you operate as a Sole Proprietorship, you pay self employment tax instead of payroll tax.

Income tax
The final type of tax you are responsible for as an eBay seller is the income tax. No matter how your business is structured, you will be required to pay income tax on the business’ net profit.

Sole Proprietors pay income tax on their personal income tax return (Form 1040). Your business profit is calculated using Schedule C - Profit or Loss From Business, and your profit from your eBay activity is added to your other income to determine your tax liability.

S Corporations file Form 1120S to report the business profit or loss. A Schedule K-1 is then prepared, which shows each shareholder’s share of the net profit or loss that needs to be declared on their personal tax return.

C Corporations file Form 1120 to both report the business net profit and to calculate the resulting income tax.

Depending on the state you do business in, you may also be subject to state income taxes on your eBay profits. The state level taxes are often referred to as franchise taxes.

Kristine A. McKinley, CPA, Certified Financial Planner(r), and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for retirement, college, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis. For more eBay tax tips, visit her blog Tax Tips for eBay Sellers .

Tags: Accounting, CFP, CPA, ebay, ebay sellers, Finance, Finance and Accounting, Kristine McKinley, Tax Tips for eBay Sellers, taxes
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Deducting Home Office Expenses for your eBay Business

Wednesday, September 19th, 2007

Most eBay sellers operate from their home. One of your biggest tax deductions for your eBay business may be your home office, so it’s important to learn what expenses you can deduct.

If your home office qualifies, you may be able to deduct part of your housing expenses on your tax return. Your home office qualifies if it is your principal place of business, and you use it regularly and exclusively for your eBay business.

To pass the ‘place of business’ test, your home office must be the principal place you conduct your business, or a place where you regularly meet clients or customers, or it must be a separate structure not attached to your home. If you store inventory for your eBay business, that may also qualify you for the home office deduction.

Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don’t use this room for other purposes. For example, if you use part of the room as a laundry room or children’s play room, you may not qualify for the home office deduction (unless you segregate the separate areas and the ‘business area’ is used only for business purposes).

Expenses that can be deducted include mortgage interest, real estate taxes, utilities, insurance, repairs, security, and depreciation. Only the business use percentage of these expenses can be deducted. The business use percentage is calculated by dividing the square footage of the office space by the square footage of the home, or by dividing the number of rooms you use for business by the number of rooms in your home.

Direct expenses, such as repairs made solely to the room used for your home office, or telephone lines installed just for business use, can be deducted in full. Indirect expenses, such as mortgage interest and real estate taxes should be allocated between the home office deduction and your itemized deductions to get the greatest tax benefit.

Caution: Your eBay business must earn a profit to take the home office deduction. If your home office expenses are larger than your business profits, you must carry the excess expenses forward to future years.

Kristine A. McKinley, CPA, Certified Financial Planner(r), and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for retirement, college, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis. For more eBay tax tips, visit her blog Tax Tips for eBay Sellers .

Tags: CFP, CPA, ebay, home based business, home office, Kristine McKinley, tax deductions, Tax Tips for eBay Sellers
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Hire Your Kids to Help Save on Taxes

Monday, July 9th, 2007

A reader recently asked how hiring their children in their business could help save on income taxes. Here’s an example:

In 2006, you could pay your child up to $5,150 (the standard deduction amount) without either of you incurring a tax liability. Suppose you’re in the 28 percent tax bracket and you pay your 15-year-old son (Junior) $5,000 over the course of a year to help package and ship items in your eBay business.

You get a business deduction for the wages paid to Junior, saving you $1,400 (28% of $5,000). If you’re a sole proprietor, you save even more in taxes because this reduces the amount of profit that is subject to self employment taxes (15.3% of $5,000 = an additional tax savings of $765).

Since your son’s earnings are less the standard deduction, he does not owe income taxes on his earnings. Even if you paid Junior more than the standard deduction, you would still save taxes. Since Junior is most likely in a lower tax bracket, his earnings would be taxed at 10 percent or 15 percent rather than 28 percent that you would pay on this income. This is called income shifting.

In addition, because Junior is under age 18, you do not have to pay Social Security, Medicare or Unemployment tax on him, like you would with a regular employee.

You could take this strategy even further by opening an IRA for your son thereby sheltering even more income from taxes.

This is a great strategy if your children are old enough and are interested in working in your business. The only thing to watch is that your children have to actually do legitimate work in the business, and you have to pay them a reasonable wage for the work they do. You can’t pay them $5,000 a year to do household chores or just to empty the garbage can (even if it’s your home office trash can!).

For more ways to save on income taxes, please check out our free special report Tax Tips for eBay Sellers .

Tags: Accounting, CFP, CPA, ebay, Finance, Finance and Accounting, hiring, Kristine McKinley, Tax Tips for eBay Sellers, taxes
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Filing Taxes for eBay Sales

Tuesday, June 19th, 2007

Q. How do I go about filing income tax for eBay sales?

I’ve never had a "real" job where I’ve had to do income tax, so I don’t know how to do this…I’m a full-time student; but I do sell stuff on eBay occasionally (about 2 items/week, sometimes more, many times I go weeks/a month without selling/listing anything), stuff I usually buy at the mall or buy from websites and then sell it on eBay for a profit.

How would I go about keeping records of my expenses and profits for tax purposes? Do I need to keep an itemized list of expenses, sales and profits or can I just add all the total money received (including final bid price + shipping buyer paid) and subtract the expenses (original price for item, tax I paid on item, shipping I paid on item to have it delivered, eBay fees, shipping I actually spent to send item to buyer)?

I’ve only started selling since last September or so…

A. If you only sell items on eBay occasionally, then you are most likely a sole proprietor (some eBay sellers will incorporate their business but most eBay sellers are sole proprietors).

Sole proprietors report their eBay income and expenses by completing Schedule C - Profit or Loss from Business and attaching it to their personal income tax return (Form 1040).

You should report your gross income (the sales price before any fees or discounts), then deduct your business expenses to arrive at your net profit.

Business expenses that eBay sellers typically incur include:

• Inventory cost

• eBay listing fees

• Paypal fees

• Shipping costs - postage, packing materials, etc.

• Mileage for trips to the post office, trips to find inventory

(most people use the standard mileage but you can use actual expenses instead)

• Home office expense - mortgage interest, real estate taxes, rent, utilities, and repairs/maintenance

• Office supplies

• Computer and software expenses

(may need to be depreciated over the life of the item)

• Telephone and internet costs

(business use only)

• Advertising

• Continuing education

There are more expenses that you may incur, but these are the most common for eBay sellers.

It’s important to keep good records so that you get all the deductions you are entitled to. And yes, you should keep itemized lists of your income and deductions - the more detailed your records, the better, especially if you are ever audited by the IRS.

You are only taxed on the net profit, but you have to pay self employment taxes on your profit in addition to your ordinary income taxes. The self employment tax is 15.3% and your ordinary income tax rate can range from 10-35%, so these taxes can add up quickly! This is another reason why you should keep good, detailed records.

To keep track of your income and expenses, I would suggest either Excel spreadsheets or an accounting software program such as Quicken Home and Small Business or QuickBooks. eBay also offers an accounting assistant (fee applies) which allows you to download your eBay activity into your QuickBooks software (very cool!).

The IRS is targeting eBay sellers and other small business owners who may be under-reporting income (or not reporting it at all), so good for you for being proactive and learning your responsibilities as a small business owner.

Tags: Accounting, CFP, CPA, E-Commerce and E-Business, ebay, Finance, Finance and Accounting, Kristine McKinley, online auctions, Sales, Tax Tips for eBay Sellers, taxes
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