If you want to make your products accessible and get them in front of as broad an audience as possible, Amazon is the biggest online marketplace around, and there are some important things to learn about taxes for Amazon sellers.
There are some unique processes and rules around selling on Amazon, however, and it’s important to know what you’re getting into before you commit.
Using the Amazon platform to sell goods or services means routing many of your platforms and transactions through Amazon itself, especially with fulfillment by Amazon (FBA). This introduces some complex variables into the accounting process, and it can affect your taxes in ways you might not expect.
Here’s what to know about the tax obligations and concerns you may have as a business owner selling through Amazon.
1. You’ll Need a 1099-K
If your business on Amazon exceeds a set amount of money and transactions, then you should receive a form 1099-K from them reporting on the total payments they processed for you.
For 2021 tax returns, that means you will receive a 1099-K from Amazon if you saw more than $20,000 in sales and more than 200 transactions processed through Amazon. The total of $20,000 refers to unadjusted total sales, which may be higher than the total money you received transferred from Amazon.
For years after 2021, this threshold will be significantly lowered. Starting in 2022 you should receive the form if you received gross payments that total more than $600, no matter how many transactions there were.
What is a 1099-K?
Your 1099-K IRS form reports transactions made through a third-party payment network like Amazon.
When you sell products through Amazon, Amazon receives and processes payments made by customers, whether made through Paypal, a debit card, or any other means, and Amazon then distributes the proper share of that payment to sellers like you. Amazon is functioning in this way as a third-party payment network between you and your customer, and they are reporting the money they’ve processed through the 1099-K.
Who Does Amazon Send the 1099-K to?
Amazon will generate and send the IRS Form 1099-K directly to the business or seller, according to the information they have on file. It should be sent to you by mail if you don’t ask for electronic delivery.
If you can’t find your tax forms from Amazon by the end of January, you should also be able to download the paperwork directly from your account with Amazon along with any other tax documentation.
What do I do if my 1099-K is Inaccurate?
If there are serious errors on your 1099-K, you will need to work with Amazon to get it corrected. If your business information is incorrect on the form, you may need to provide Amazon with your tax information again as if for the first time. File your tax paperwork again, and they should create a new 1099-K for you.
If you believe there is an error in the numbers on your 1099-K, you may need to reach out to support from Amazon.
2. File Schedule C as a Small Business
When it comes time to prepare your annual tax return, most Amazon sellers will also need to file the tax form Schedule C, Profit or Loss from Business, which is an add-on to form 1040, the standard personal tax return.
Even if selling goods on Amazon is only a small side gig, the money you earn counts as income you receive as a small business owner, whether or not you have a registered business or license. Filling out schedule C gives you an easy way to file that self-employment income.
3. Maximize Your Tax Deductions
Filing schedule C not only allows you to report that income as a business, but it also provides you with the opportunity to set off that income to your benefit. As an independent small business, you can keep track of all the money you spend to keep your business going, and then you can claim those expenses as tax deductions.
Tax deductions work by subtracting business expenses directly out of your taxable income. This will lower the taxes you owe and potentially even bring you down to a lower tax bracket. Here are just a few of the business expenses you can claim as deductions to offset your revenue:
- Office supplies
- Mileage and travel expenses for business purposes
- Salaries you pay to employees
- Office rent and maintenance
- Healthcare premiums
- Retirement savings contributions
- Professional fees
- Continuing education
These are deductions specifically meant for small businesses, which means you can claim them without giving up the standard deduction for your personal tax return. There are other deductions available for any individual taxpayer, but those require foregoing the standard deduction.
4. Does Amazon Collect Sales Tax for Sellers?
On top of income taxes, Amazon sellers have to also be concerned with sales tax. This is a complicated issue for online commerce, and the laws around it are still developing, and sometimes vary from state to state.
The good news is that Amazon can easily apply and file sales tax for you on your sales through their platform, but you have to tell Amazon where and how to apply sales tax in different areas for different customers.
Your specific sales tax requirements in each state will depend on having a sales tax nexus in that state. This is determined differently for sellers using Fulfilled By Amazon.
What is a Sales Tax Nexus?
A sales tax nexus refers to an established presence in a state. If your business has a significant economic presence in a state, then you have a nexus there, which imposes different requirements on your business in terms of sales taxes.
You can establish a sales tax nexus in a state by having your main offices located there, by doing a substantial amount of business there, or by storing goods there. This means that FBA sellers may have a sales tax nexus in any state where their goods are stored by Amazon.
5. An Accountant is Your Best Tool to Lower Your Tax Bill
Anytime you start earning more income, you’re going to start owing more in taxes as well, even if you’re only trying to earn a little more money on the side. If you’re not prepared, this can quickly add up to a significant tax burden, especially if you’re not well-versed in finding deductions to bring it down.
Fortunately, you don’t have to figure out the whole tax system yourself if you’re willing to seek help for your small business taxes. Work with a professional from 1-800Accountant and you’ll have someone on your side to get control of your tax bill and maximize your savings.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.