The original poster wrote:
(1) Do I need to pay federal and state income tax for all the income
earned from online selling?
My answer:
Yes, you are required to pay federal income tax and self-employment
tax (Social Security and Medicare taxes), and for filing quarterly
estimated taxes based on your net income during the year from selling
books on Amazon or any other online bookselling venue, such as eBay,
Half.com, Abe.com or Alibris.
Since you don't have an employer reporting your income (from selling
used books online) and withholding a portion of those proceeds to pay
your tax obligations, you must inform the IRS about your income from
Internet bookselling and make quarterly tax payments on the profits
during the year. Quarterly installments of the estimated tax,
submitted with Form 1040-ES, are due April 15, June 15, September 15,
and January 15 of the following calendar year.
I'm the author of a book that explains how to operate an online used
book business, and you can read free excerpts from the book by
visiting my blog:
http://www.weberbooks.com/selling/selling.htm
If you have additional questions that aren't answered here, you're
welcome to contact me through the "Ask a question" link at the top
right of my blog. My book does explain how to meet your income tax and
sales tax obligations, as well as questions such as what documents
you'll need to keep and whether you can take a tax deduction for using
part of your home to store your book inventory. The book is "The
Home-Based Bookstore: Start Your Own Business Selling Used Books on
Amazon, eBay or Your Own Web Site" by Steve Weber (ISBN 0977240606).
Since you are just getting started, the best way for you to meet your
legal and tax requirements is to report your bookselling profits (or
losses) on your IRS 1040, Schedule C, "Profit or Loss From Business."
If your income from bookselling has not been substantial during 2005,
you probably do not need to hire an accountant to figure your taxes.
Instead, I'd recommend you purchase a copy of TurboTax or TaxCut
software. That way you can complete all the necessary forms, and
you'll receive the instructions for completing those forms in plain
English instead of the jargon you'll see in the IRS instructions. I've
used both TurboTax and TaxCut to report income from my online
bookselling, and they are well worth the money, because they save you
hours of frustration from not having to decipher the IRS's language in
their instruction booklets.
If you made a profit during 2005 from bookselling, you'll also owe
some state income tax for that, so I'd also recommend you use the
state version of TurboTax or TaxCut to figure your state tax
obligation. Both programs are very easy to use, and I know that during
the past few years, TaxCut has been considerably cheaper.
Based on your question, I have the impression you didn't pay estimated
quarterly tax during the 2005 calendar year. So if you did have net
income from bookselling during 2005 that you haven't yet reported, you
may owe a penalty for late tax payment. (Or if you're employed and
have part of your income witheld for taxes already, you may not owe
more tax, but may only receive a smaller refund). For future
reference, if you do work at a job where your employer withholds
income for taxes, you might consider asking your employer to increase
your withholding. That way, you may be able to avoid mailing in
quarterly estimated payments to the IRS and your state resulting from
your book profits during the 2006 calendar year.
To figure your taxes, you need to account for every transaction
involving your book business. Keep receipts and records, and put your
expenses into categories such as "postage," "shipping supplies,"
"books," and so on. This is the information that will go on your
Schedule C. So for next year, I'd recommend you have a separate
checking account to track expenses and income from your bookselling.
If your bank enables you to download your transactions into Quicken or
another personal-finance program, you can automatically categorize
expenses such as "postage," etc., in Quicken. This will greatly lessen
your bookeeping chores at tax time next year.
The original poster wrote:
(2) If answer to (1) is 'yes', then do I need to deduct all expenses incurred
and only report the net "profit" or the entire earned income from book
sales? For example, do i deduct the costs of envelopes, postage,
online commision charged by amazon etc, and report only the profits
incurred as the net income earned?
My answer:
Yes, you will pay tax only on your net profit. Your expenses incurred
in selling books will be deductible expenses that you'll list on the
Schedule C when you file your taxes. For example, let's say you sold
$500 of books in 2005. The $500 is the gross income from your
bookselling. Meanwhile during 2005 you spent $200 in postage, mailing
containers, commissions paid to Amazon, mileage during to book sales,
plus other bookselling-related costs you may have. Your net profit is
$300; you'll pay tax on that. If you normally pay 18 percent tax on
your income, you'll pay about 18 percent tax on that $300.
The original poster wrote:
(3) What happens if books i'm selling online incur a net loss...?
My answer:
Let's pick up with the example from above. Let's say you had $500 in
sales during 2005. But your expenses were $750. You had a loss of $250
from your bookselling during 2005. In this case, the loss of $250
would be deductible from other income you may have.
One question you should ask yourself during the coming year is whether
you intend to pursue bookselling as a business or a hobby. As far as
the IRS is concerned, your business must become profitable (and thus
paying taxes) within three years or it will be considered a hobby, and
from that point forward none of your bookselling-related expenses will
be deductible on your tax return.
The original poster wrote:
(4) Do I have to pay any other tax other than federal and state income taxes?
For example, do i need to pay sales taxes?
My answer:
Yes, if you live in a state where sales tax is charged on retail
purchases, you are responsible for paying sales tax to your state's
tax department. However, you are only obligated to pay sales tax on
the books you shipped to buyers in your state.
To pay the tax, you?ll need to open an account with your state's Tax
Department. As part of this process, you'll receive a "resale
license." In some states this is called a "resale number" or "sales
tax certificate." So this will add to your bookeeping chores, but
there are benefits. For example, in obtaining a resale license, your
state is recognizing you as a legitimate business, and you will *not*
have to pay state sales tax on the books and other supplies you
purchase to run your bookselling business. Also, a resale license will
enable you to more easily open accounts with used and new book
wholesalers -- if should you ever decide to expand your business and
go that route. Nowadays, most wholesalers require you to provide proof
of a resale license before you can open an account with them, whether
you are purchasing wholesale books, CDs, DVDs, or any other type of
merchandise for resale.
Also, most used bookshops will give you a 10 percent or 20 percent
"dealers discount" when you buy books there -- if you show your resale
certificate.
Again, you don?t collect state sales tax on books you ship to people
with addresses outside your state. This is because Internet sales (as
well as fax, telephone, and mail-order sales) aren't subject to sales
tax unless you have a physical presence in that other state -- meaning
an office or warehouse.
In some states, shipping and handling fees are not subject to sales
tax, but in some they are -? you will need to investigate the issue
for your home state. |
