Federal income taxes lurk in the hearts and minds of the American taxpayers. Many worry that they should claim more income, and others try to figure out ways to avoid paying taxes. Internet sales are a way to generate money, and eBay is one of the most popular selling websites. Set up Internet sales as a business and pay taxes only if you make a profit.
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Internet sales have potential for making money, but the expenses are significant. If you sell on eBay or a similar Internet website, your expenses may outweigh any income you receive. If your expenses are more than the income, you will not pay additional federal income taxes although you have reported the income. Selling on eBay over the long term is expensive, as you need merchandise, a computer, a camera, advertising, shipping supplies and postage. You will pay eBay fees, PayPal fees and high-speed Internet fees. All these cut into profits, and profits are the taxable part of income for federal income taxes.
The Internal Revenue Service expects you to report all your income. Whether you pay more federal income taxes or not is all in the numbers. Put the numbers in the blanks and read the result. You may be pleasantly surprised.
File an IRS Form Schedule C for your eBay or Internet sales business. You can be a sole proprietor, so you do not need to incorporate. You need to file with your state to pay sales tax on items sold within the state borders and submit the sales tax you collect. Schedule C includes profits from Internet sales as gross income on the form. List the expenses, include fees on the appropriate line and subtract these from the gross income. The net income remains and is part of your income for federal income taxes. Keep records of your expenses and sales in case of audit.
Running a business is an honest endeavour; selling under the table to avoid income taxes is not. You have the added advantage of paying self-employment taxes to increase your Social Security contributions if your eBay sales make a profit. The Social Security Administration uses 35 years of employment history to calculate your retirement. Include all your income to get the most in your retirement years.
PayPal will be reporting any income received through its payment processing to the IRS, starting in 2011. The reporting is limited to sellers with more than 200 transactions or more than £13,000 in activity. This will exclude many small sellers on eBay. Although PayPal does not report your transactions, this is not the green light for you to avoid reporting all your income. Reporting your income as a business works to your advantage.
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