If you sell items on Amazon, then there are several tax issues of which you need to be aware of. Your status as a business, even if you don’t hold a license, means that you must file annually with the federal government.
There are some state tax laws in the U.S. that you may also need to follow.
Your Amazon Tax Questions Answered
If you have a business license, then you will need to file a Schedule C. You don’t necessarily need to have one to become a seller on Amazon, but some state laws do require that you have one.
Each state has different criteria to meet. If you have employees or inventory that you carry, there is an excellent chance that you’ll need licensure. The IRS requires that you file taxes regardless of your compliance with local statutes.
Here are some more of the critical issues you’ll need to consider as an Amazon seller.
Do you need to have a 1099-K?
Amazon sellers who have more than 200 transactions and $20,000 in unadjusted gross sales receive a 1099-K form each year. You can access this document online in Seller Central. You’ll also get one by mail or e-mail based on the preferences you set.
If you have more than 50 transactions per year, Amazon will need your tax information. Failing to provide it can cause you to lose your status as a seller. Once the document is in your possession, you can use the figures for your taxes.
Are you collecting sales tax?
There are different sales tax collection requirements that you must follow as an Amazon seller. Even if you don’t live in the same state as a customer, you might need to collect these funds from a purchase because of a “nexus” requirement.
A nexus is defined as having a presence in the state by most definitions. That means if you carry inventory in Washington State, work in New York, and have employees in California, you’d need to collect sales tax from customers in each location.
Sales tax collection is complex. There is much more information further down in this guide.
What are your deductibles?
If you sell on Amazon, then you’re likely defined as a self-employed individual. That means you can claim specific deductions based on your expenses. Make sure that you’re keeping all of your receipts that can connect to your online business.
Deductions will vary for everyone. Some of the expenses you might be able to include are Amazon fees, home office costs, subscriptions, and the cost of goods sold.
If you advertise your Amazon listings online, then these costs may qualify as well.
How Do I Know If I Have a Sales Tax Nexus?
Online sellers must collect a sales tax for the communities and states where they have a nexus. The term applies differently across the United States, but a general rule of thumb is that you must have a significant presence that requires you to be in compliance with local laws.
Economic activities are the most common way that all businesses, including sole proprietorships, qualify for this tax issue.
Sales tax collection is much different than it was in the past. You may need to collect special levies and city-specific taxes when selling products on Amazon. That amount is in addition to the state-based requirements that you must also meet.
Most counties also levy a sales tax on goods sold.
If you can prove that you don’t have a sales tax nexus, then you’re not required to collect those funds from buyers regardless of where the item ships.
Dropshipping does not apply to the common nexus types that Amazon sellers face. If you store inventory to fulfill orders, then you will face this nexus issue.
An inventory nexus is what catches a lot of third-party sellers unaware when selling online. The associated sales tax registration and business licensure requirements can create a significant burden on new ventures.
If you have a nexus, then you must obtain a sales tax permit or license. Then Amazon will help you to start collecting these funds from customers that live in that area.
You should know that most states consider it to be illegal to collect sales taxes without a permit to do so.
Origin vs. Destination Sales Taxes
Some states require you to collect origin-based sales tax. Others want you to follow up on destination-based figures.
That means there are places where you’ll need to collect a sales tax percentage based on where your nexus resides. Other sales will require you to include the rate from the buyer’s purchasing address.
Arizona, California, and New Mexico have unique sales tax requirements that you must verify as an Amazon seller to ensure that you remain in compliance.
Each state will tell you what your requirements will be based on the nexus you have. You’ll then be assigned a filing frequency, usually quarterly or annually, where you must file and pay the funds you’ve collected.
If you have a robust sales volume on Amazon, you may have a monthly filing requirement.
You will need to file a sales tax report even if you don’t owe anything. Failing to do so can result in penalties. That’s why you must pay close attention to the instructions included with your permit.
Most states set their deadline on the 20th of each month for filing, but this expectation can vary. This process can be time-consuming since states like Washington require you to report how much you collect for every individual sales tax district.
What If I Don’t Make a Profit on Amazon?
If your net business income was zero or a loss, then you may not need to pay federal taxes. You will still need to remit the sales taxes you collected from your Amazon sales based on the frequency instructed by your permit.
You are still required to file a return with the IRS and most states, even if your business isn’t profitable for the year.
There may be some financial benefits to filing. You may be entitled to business tax credits, and the only way to claim them is to submit your paperwork. Most companies can write off their business losses against future income.
If you don’t owe any money and choose not to file a return, the IRS can file a return on your behalf. They have the authority to do so if they think you owe money.
If this happens to your Amazon business, then you might need to file to ensure that your figures are accurate.
Don’t Forget About the Self-Employment Tax!
If you are an Amazon seller operating as a sole proprietor, then you’ll need to plan for the self-employment tax.
That means you’ll be paying the employer’s responsibility for the Social Security and Medicare taxes on your income. If your net income is at least $400, then you are subject to a 15.3% levy on the first $132,900 you earn. There is an additional 2.9% on the net income that exceeds this amount.
As a general rule of thumb, it helps to set aside about 30% of your net income to ensure that you can fulfill all of your tax obligations as an Amazon seller. If you underpay by more than $1,000 for the year, then the IRS can issue a penalty that will take even more of your profits away.
If you have any questions about your status, it helps to plan ahead so that you’re not scrambling for answers at the tax deadline. Now is the perfect time to get your books in order so that you can file with ease.