Small Business Advice - Online Tax Forms

Legal Tips with CLIFF ENNICO Hi, I’m Cliff Ennico, legal editor of SBTV.com with some tips on taxing issues when selling stuff online. A lot of people think that the internet is a tax free zone, that when you’re selling stuff online as oppose to an a brick or mortar shop, the normal legal in tax rules do not apply. But this is somehow a parallel universe where people can engage in capitalistic acts of commerce without any government intervention of any kind whatsoever. Well, first of all that has never been true, the normal laws in taxes apply when you’re selling stuff online, you are subject and have always been subject to the same laws in taxes that apply when you’re selling stuff in a brick and mortar store in your home state. But it’s becoming less and less true these days; the IRS is really starting to crack down on online commerce in a very big way. They’ve come to realize that they have lost billions and billions of dollars in tax revenue each year to people selling stuff online and they’re starting to enforce the laws now more aggressively than ever before. So if you are not, if you’re selling stuff online say on eBay or Amazon.com and you’re not complying with the tax laws in your state. If you’re not paying taxes each year, now is the time to get into compliance because the IRS is coming after you. It’s only going to be a matter of time before they pick up on what it is you’re doing. So what are some of the taxes that you have to worry about? Well let’s begin with the basics, let’s begin with Income Taxes. There are three numbers you need to know, no, they’re not actually numbers, they’re dollar amounts. The first is $1, if you were selling stuff online, on eBay, Amazon, from your website, anywhere online and you’re making at least $1 in profit. You’re selling stuff for at least $1 more than what you bought it for; you are required to pay income tax on that $1 in profit. There is no minimum amount, below which, you don’t pay income tax. That’s a myth that a lot of people on the online community believe but it’s absolutely not true. There’s no diminish amount for income tax. There is for some other taxes but not for income tax. The second dollar amount you have to think about is $400.00. If you’re selling stuff online and you make at least $400.00 of profit each year, not only do you have to pay income tax now, you have to pay what’s called Self-employment tax. Or S.E.T. Remember when you work for a corporation, all those Federal and State taxes that were taken out of your paycheck before you could spend your money. Things like FICA, FUTA and Medicare tax, well congratulations, if you’re selling stuff online and you’re making at least $400.00 in profit each year, you are required now to withhold those same taxes from your own paycheck. So that’s the, what they call the Self-employment tax or S.E.T. It kicks in at $400.00 of profit. The third number that you have to think about is $1,000.00. If you’re selling stuff online and you have at least $1,000.00 of tax liability every year, if you have to pay at least a thousand dollars in taxes to the IRS every year, you are required the good news is there aren’t anymore taxes that you have to think about. The bad news is now the IRS doesn’t want to wait until April 15 to collect their income and their self-employment tax, now you have to pay those taxes in four, quarterly installments, the dreaded estimated tax payments. That’s when that kicks in. $1,000.00 in tax liability, for most online sellers, that number will kick in somewhere between $1,000.00 and $5,000.00 of profit. When you find yourself selling online, if you see yourself getting near the $1,000.00 in profit level, talk to your accountant and have him or her do a calculation to tell you exactly at what point you’re going to hit the $1,000.00 tax liability threshold and we’ll have to start paying quarterly estimated taxes. Look folks, nobody likes doing this, but its part and parcel of running your own business. Welcome to the club, all self-employed people have to deal with these things at one point or another. Shifting gears now, let’s talk a little bit about sales taxes. When do you have to charge sales tax when you’re selling online? Well under current law, there’s a moment to put to change things right now but it’s not the law yet. Right now, there’s only one thing you have to worry about, whenever you sell stuff online and your buyer lives in the same state that you do. You are required to collect and pay to the state government sales tax on that transaction. So if I have a business out of my home in Connecticut, selling stuff on eBay, I put something up on eBay and the winning bidder is a Connecticut resident, I am required to collect and pay 6 % of that of the winning bid amount to the state of Connecticut as sales tax and that is the rule in virtually every state that has a sales tax. Question, can you deduct, can you add the sales tax onto the person’s winning bid? In my example, can I just add 6 % to the person’s winning bid amount that I don’t have to even to my profit pay the sales tax, the short answer is yes but only if you warn the buyer up front that you’re going to do that. So for example, whenever you put something up on eBay or Amazon, there should always be a little, little statement, somewhere on that page, each one of your auction or selling pages that says, Note: Note to residents of (your state) state and local sales will be added to your purchase price or your winning bid amount. If you put that statement on all of your auction pages and selling item pages, you’ve done with the law requires and you can add the sales tax onto the individual’s purchase price that they pay. You don’t have to ask their permission to pay the sales tax. If you don’t do that then you have by law, you cannot tack the sales tax onto the winning bid or the purchase price considered usury believe it or not in most states. What you’re going to have to do there is you’re going to have to dig in to your profit and pay the tax out of your profit which may be okay but most people don’t want to make a habit of doing that. So just put that statement in all of your auction pages on eBay or your selling pages on Amazon.com and you’ll be fine. Last but not the least you have to consider the dreaded Use tax. This is a tax not on things you sell but on things you buy. Every state that has a sales tax also has a use tax. You pay a use tax whenever you buy stuff; you buy stuff for your own consumption for which you do not pay a sales tax. So for example if you buy a bubble head doll at a flee market and turn around and sell it on eBay that’s inventory. You do not have to pay use tax on that. If you go to your local staple’s outlet and buy a box full of paperclips and pay your state sales tax at the register, you do not have to pay use tax on that purchase because there’s no double taxation. But let’s say you need a new laptop for your online selling business and you buy one on eBay, let’s say I’m in Connecticut and I buy a laptop from a seller in California. It’s an interstate sale so, there’s no sales tax on that transaction at least not yet, but I will be required to pay a use tax of 6% to the state of Connecticut for the privilege of using that laptop in a Connecticut base business. Don’t you love the way lawyers work? We’re not taxing interstate commerce folks, we’re taxing the use of the item within the state of Connecticut, which is not an interstate transaction at all, and it’s strictly within the state. You’ve got to love a lawyer sometimes, we’re very creative people. Why should you be concerned about the use tax laws, because the states especially are starting to enforce these very, very aggressively. The states have lost billions and billions of dollars of sales tax revenue to e-commerce and one of the ways they’re trying to recoup it is to enforce their use tax laws more aggressively. So if you’re buying stuff online or buying stuff for male order catalogues for your own consumption, my advice is, when you file your state income tax for every 12th at the end of the year, look for the item that says personal use tax and put a little amount on there. 50 bucks, a hundred bucks, give the state a little something so that if they ever do come down and audit you, you’ll be able to say with the straight face that you complied with the use tax laws and that you’re not a tax delinquent. I’m Cliff Ennico for SBTV.com.