The power of Amazon’s marketplace has attracted many sellers. As the dominate online retailer in the US, Amazon counts nearly 2 million small and midsize businesses as third-party sellers.
With so many SMBs finding success on the massive e-commerce site, understanding Amazon seller tax information is critical.
Amazon seller tax information 101: A required course in SMB survival
Many small businesses have moved to online retail, and some have started side hustles on Amazon, leading to business owners questioning what to do about taxes. To put it in perspective, Amazon store owners are currently making up about 20-30 percent of my e-commerce accounting business.
The majority of these business owners are starting confused and disgruntled about their tax obligations. Typically, the first shred of information I share with clients is that you are required to report your Amazon sales as income on your taxes, just like your other streams of income.
Another thing I have to clear up right off the bat?
The time to start thinking about taxes isn’t when the deadline starts approaching next spring. It’s as soon as you start using Amazon as a way to make revenue. The most efficient way to remain tax compliant and save money in the long run is to strategize well in advance.
There are four things you should know when it comes to Amazon seller tax information:
- The 20K rule
- Fulfillment by Amazon (FBA) sellers are responsible for collecting sales tax in all states that have nexus
- What deductions qualify as an Amazon seller
- Work with a professional
Let’s delve into each of these points below.
The 20K Rule
Internal Revenue Service (IRS) regulations require that U.S. payment processors, including Amazon Payments, file a Form 1099-K to report unadjusted annual gross sales or payment volume information for customers that meet both of the following thresholds in a calendar year:
- More than $20,000 in gross payment volume
- More than 200 transactions
There’s no way around it.
You need to report your take-home income on Amazon when you file taxes. If you meet the $20K/200 transaction criteria, then the IRS already is aware that your Amazon business exists, so you can’t forget to file.
If you don’t meet either of the above criteria, that doesn’t mean you’re off the hook. You still have to report your Amazon FBA income tax. The bottom line is that if you’re a professional seller or an individual seller with over 50 transactions, you need to make sure your tax information is up to date with Amazon.
The consequence of not complying can be damaging for your business – if your tax information isn’t up to date then you can lose your Amazon seller status.
Sales tax nexus
Amazon FBA sellers are responsible for collecting sales tax in all states where they have “nexus.”
Nexus is defined as a physical business presence in a given state, meaning where Amazon warehouses store your tangible products.
It’s a bit tricky, but you have nexus in any state that stores or ships your products from an Amazon Fulfillment Center. You also have nexus in the state where you reside, especially if you have any kind of office or business-related location there.
Having nexus in multiple states is also common, so it’s necessary to determine your filing requirements to maintain compliance. You can do this manually, but you don’t have to. Software automation services like Tax Jar will auto file for you or you can work with a tax expert.
Deductions are key when it comes to Amazon seller tax info
One of the benefits of being self-employed is being able to claim deductibles on business expenses. Amazon sellers, like any other self-employed individual, can claim deductibles on things like home office expenses and education costs.
As an Amazon seller, your expenses will generously add up, which is why it’s beneficial to use them as deductions of your overall gross Amazon income. I recommend to my e-commerce clients to save all receipts related to online business activities from the start so that it’s easier to manage down the line.
The following are some potential deductions for Amazon sellers. These vary based on situation and/or seller, so it’s best to double-check with a professional on what you are eligible to deduct.
- FBA Inventory costs
- Shipping costs (including fees and supplies)
- Amazon fees
- Cost of goods sold (wholesale price, cost of manufacturing, etc.)
- Home office costs (Internet, tech, software, furniture, supplies, etc.)
- Education for online business and e-commerce
- Employee salary and benefits
- Consultant fees (accountant, lawyer, designer, etc.)
Tax professionals can make your taxes less taxing
In reality, tax laws are constantly evolving. With the implications of the coronavirus pandemic, there could be additions, changes, or tweaks unfolding ahead of the 2021 tax season. This is one of the reasons that working with a professional – specifically an e-commerce CPA – can greatly help you out.
Another reason: how much do you actually owe in taxes?
Unfortunately, there isn’t a one-size-fits-all answer to that question. There’s a lot that goes into accurately calculating how much you owe. A professional can help you understand what you’re required to pay (self-employment tax, income tax, sales and use tax) and also strategize ways to save you money in the process.
All of this can be extremely overwhelming for a new Amazon seller – the anxiety of messing up, inaccurately reporting to the IRS, shorting yourself from your hard-earned money.
The good news? You don’t have to go it alone. There are professionals well-equipped to learn the ins and outs of your business and steer you in the right direction – which includes keeping money in your pocket.
Better.
Faster.
Amazing every time.
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