If you sell items online, the IRS may get a cut of your income

What’s changed for online sellers?

Previously, you only had to report your income from online sales to the IRS if you made more than $20,000 over 200 transactions.

But thanks to a provision in the stimulus checks bill, the federal threshold will drop starting in 2022.

That means when you file your taxes in 2023, if you’re an online seller, you may receive a form, whether you consider yourself a full-time salesperson or not.

It’s important to note that you may not be taxed on the money that you made, it just needs to be accounted for in your tax return for the IRS to make that determination.

The change in policy comes amid news that the IRS has been grappling with a massive tax gap. The difference between what taxpayers owe and what they actually pay is an estimated $381 billion every year, according to a 2019 IRS report.

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What is considered taxable income?

It all depends on how you look at your online store. If it’s just an opportunity to clear your closet and make back a small amount of what you paid initially for your belongings, then you’re probably not going to have to deal with taxes.

That will be the case for most eBay sellers, as 85% of users are mostly selling preowned items they no longer use, according to a recent report from the company.

But if your online store is how you make — or supplement — your income, you may be seen as a small business or independent contractor and you’ll be expected to pay taxes.

That principle extends beyond the digital world. If you’re shopping yard or estate sales for vintage items that you’re then selling online at a profit, that counts too.

The same goes for those who’ve turned hobbies or skills into profitable side hustles.

Any net earnings (what you make above your losses or expenses) that exceed $400 should be reported to the IRS. If you’re struggling to sort out whether your hobby makes you an independent contractor in the eyes of the agency, the IRS offers some helpful tips.

How to handle your taxes now

Whether you sell on eBay, Etsy or any other online platform, you’re considered a self-employed contractor. You may receive payments from the site you sell on, but they are not your employer and they won’t withhold taxes from your earnings.

That means you have to manage paying the taxes owed to the IRS yourself. Independent contractors owe the tax agency for any net profits above $400. You’ll have to include a Schedule C form when you file your tax return.

To figure out how much you need to report as your net profit, take all that you made and subtract the expenses for:

• Any fees or percentages you pay to the online site/marketplace.
• The cost of your materials and equipment.
• Studio rental or the use of dedicated space in your home for a workshop.
• Shipping costs.
• Bank fees.

The IRS expects you to pay income tax as you earn the money. You’ll need to estimate how much you’ll earn over the year and make quarterly payments based on that figure or you could face fees.

You may also face state taxes on your earnings. How much you’ll pay — if you have to pay at all — varies from state to state.

Generally, you’ll owe state taxes if your business has a physical store, office, factory or distribution center in the state. That means if your business has operations across multiple states, you may be required to pay taxes in those states.

You may want to enlist the help of a tax prep professional or a financial planner to help you figure out what your tax situation is.

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What does this mean for people who buy online?

With an increased tax expectation, online sellers may need to up their prices to cover the added expense.

There are a few ways to lessen any impact these tax changes may have for you as a buyer and earn a little extra money to spend on your next online purchase right now.

• Make sure you’re always paying the lowest prices. Finding the best deal online doesn’t have to mean flipping between 12 different tabs, comparing prices to the penny. Download a free browser extension that will automatically scour for coupons or better deals every time you shop online.

• Earn a few extra bucks to spend online by spending time online. Sign up for a rewards program that will give you gift cards for watching videos online. All the points you earn can also be exchanged for PayPal cash, which you can use to subsidize your eBay or Etsy purchases.

• Use your grocery bills to fund other purchases. Download an app that gives you cash back at hundreds of popular retailers just for snapping pictures of your receipts. You can also scan receipts from restaurants, big-box retailers, drugstores, hardware stores and pet stores. The more you scan, the more points you earn and the more you’ll save.

• Take a little of that extra income and invest it. If you earn a little extra income, you can use a beginner-friendly investing app to make some of that money work for you.