If you are a reseller who utilizes Amazon or eBay, you should know that the government passed legislation targeting resellers who are not paying taxes on their profits. Starting with the 2011 tax year, sites like these will begin filing 1099-K forms with the federal government for all users who earn more than a certain transaction number or sales figure.
If you already pay taxes on your sales revenue, you may barely notice the new legislation. However, if you've been flying under the radar, your days of avoiding taxes are finished. Here's what resellers need to know regarding the 1099-K.
Who is affected? If you opened an eBay account in order to clean out your closet, have no fear--the IRS won't be knocking on your door anytime soon. That is, unless you have a very big closet.
Beginning with the 2011 tax year, IRS regulations require that U.S. payment processors, including Amazon and eBay, file a Form 1099-K for sellers who exceed $20,000 in gross sales and/or 200 transactions in a calendar year. These regulations also require that all sellers have taxpayer identification information on file, regardless of sales volume.
So if you anticipate completing more than 200 transactions, or more than $20,000 in gross sales, be prepared to file your small business income and pay taxes. Otherwise, you will be hearing from the IRS.
What to do. In order to pay the least amount of taxes and avoid IRS trouble, run your side business like a professional. Here are a few basics to get you started.
Track expenses. Maintain receipts for all purchases made relevant to your reseller account. Also, track your mileage as a business expense, such as round trips to the post office. If you use a home office, you may be able to claim these expenses as well. A general rule of thumb is that if you wouldn't buy it if you didn't have the business, you can probably claim it against your profit. Set up an Excel spreadsheet or utilize an online accounting software tool like Outright to help you keep accurate records. Online tax preparation software can also be helpful.
Estimate taxes. The 1099-K form breaks down your gross sales for each month throughout the year. Therefore, if you think you will exceed the thresholds set by the IRS--and especially if you have been flying under the radar thus far--set aside a portion of your profits to pay the tax you'll owe. In order to do this, it's best to estimate your annual income at the beginning of the year and estimate your taxes. In fact, if you think you'll owe the IRS more than $1,000, you'll want to pay estimated taxes quarterly as well.
Set up a business bank account. If you haven't done so already, open a separate bank account specifically for your reseller's account. Use it for business-related purchases and deposit all revenues therein. A separate bank account streamlines the recordkeeping process. The same goes for small business credit cards--open one specifically for your business instead of using your personal account.
Final thoughts: If you have always paid taxes on your revenue, then it's business as usual. But if you have been taking profits and avoiding taxes, it's time to change your ways. It's basically a situation of "pay them now, or pay them later," and if you opt to pay later, you'll probably owe a lot more due to interest on your late tax payment, plus penalties.
Keep accurate records, follow all the necessary guidelines, and pay the government what it is owed, and you can continue running your side business. Plus, if you or your spouse file a W-2, a business loss can turn into a "gain" by reducing the amount of income you owe taxes on.
Are you a reseller? What are your thoughts on the new IRS guidelines?
David Bakke runs an online reselling business and talks about taxes, small business finances, and retirement planning on Money Crashers Personal Finance.