Whether you are a new seller or a seasoned pro, taxes are perhaps the least exciting part of being an entrepreneur. (They’re not fun when you’re not an entrepreneur, either!)
The reality is that taxes are an inevitable part of life. And if you sell on Amazon, they become an inevitable part of your business. But here’s the thing: When you start selling on Amazon, it’s not just your own and your business’ taxable income you have to worry about. All of the sudden, you’re…responsible for your customers’ sales tax?!?
Today, I will teach you how to interpret sales tax reports and how sales tax affects your own accounting for your Amazon store.
I have been selling on Amazon for years. And, in case you don’t know this from watching Just One Dime Amazon seller training videos, I happen to love accounting. I love knowing how taxes work so that I can better leverage my own revenue. And I want to help you make sense of this tricky subject, too.
Download your Amazon Fees Report.
Anytime you do deal with your business’ bookkeeping and accounting, it’s handy to know what fees you pay to Amazon. These fees are a large chunk of your operating expenses, expenses you pay to run (and operate) your business.
There are up to 72 (!) fees that Amazon can charge sellers. Rather than hunting them all down and hoping you’ve found all the ones that might apply to you, you can find them all in one place.
- Login to your Amazon Seller Central Account.
- Click on the three horizontal lines in the top left corner.
- Under Payments in the left-hand menu, click Payments.
- Click Date Range Reports.
- Click Generate Report.
- Click Summary.
- Select the time period of your report.
- Click Generate.
Now you have a date range payment report that includes all of the fees you’ve paid to Amazon for that specific time period. And you can use that to total your expenses.
Understand your 1099-K.
When you first sign up for your Amazon Seller Central account, Amazon asks you to fill out a W-9 form. And it requires you to enter either your employer identification number (EIN) or your social security number (SSN) as your tax identification number (TIN).
Based on the information you provide on your W-9, Amazon reports your account’s revenue each year to the IRS. And to you as well.
This will come via your 1099-K. Amazon must mail your 1099-K to you by January 31 of each year so you can do your taxes.
But what exactly is on your 1099-K and how does it affect your taxes and accounting?
If you sell in the USA or are an American citizen who sells abroad, you will receive a 1099-K if your Amazon store has accrued at least $600 in revenue that year. Your 1099-K will tell you exactly how much revenue you made that year. It will also tell the IRS what amount of money they might expect you to pay taxes on.
Once you know your revenue from your 1099-K, you need a bookkeeping system. I’ve got a great, simple system that I will show you here. You might also choose to purchase a professional bookkeeping software or even hire an accountant to handle your bookkeeping for you, depending on how much you want to spend.
Regardless of how you track your finances, you need a system where you can measure your revenue against your expenses to get your net profit, which is your total net revenue minus expenses.
Obviously you want to know your net profit so you know how well your business is doing and how much money you’ve made. But there’s a critical tax reason you need to know net profit, as well.
Businesses are taxed on their profits, not revenue. And without a bookkeeping system, you might not know the difference.
Do NOT under any circumstances pay taxes on your net revenue. You can, it’s not illegal. But you’d be paying way more money to Uncle Sam than necessary.
Let me walk you through this store’s revenue, expenses and profits to show you why you do not want to pay taxes on revenue.
From both our Amazon date range report and our 1099-K, we know that this store’s annual revenue was $455,235.28.
We can also see that this store paid Amazon $207,785.58 in fees, which are a large chunk of its operating expenses.
And from our bookkeeping records, we know this store also paid $94,578.40 in COGS, cost of goods sold. COGS are the cost to make and ship your products.
To calculate net profit, we simply subtract the combined total of COGS and operating expenses from net revenue:
$455,235.28 - ($207,785.58 + $94,578.40) = $152,871.30
While it’s pretty nice, that net profit of $152,871.30 is way less than the store’s net revenue of $455,235.28. I don’t know about you, but I’d much rather owe taxes on the smaller number, net profit, than that much larger, net revenue number.
If you pay taxes on revenue, you will be taxed on everything your business took in including all the expenses you paid throughout that time. Those expenses add up to quite a lot.
Now that we understand our 1099-K and how to calculate what we actually owe taxes on, let’s take a closer look at that Amazon date range report.
Remit your customers’ sales tax to the state.
Down in the bottom right hand corner of your Amazon date range report, it says “Tax”. And the numbers below should show a debit and a credit.
What does this mean?
This “Tax” is sales tax. Sales tax is when state and local governments collect tax on the sale of a retail product. The charge is a percentage of the price of the product, and sometimes there is also tax on shipping. The tax on your date range report is the state sales tax that your customers have paid when they purchased your products.
But why does it appear as both a credit and a debit?
When your customers purchase your product, they give you the sales tax on the product. That money goes into your account: that’s the credit. Amazon then remits (pays) that tax to the appropriate state by removing that money from your account. That’s the debit. The money goes in, it comes out, and your balance stays the same.
You can see in our example below that the exact same amount, $18,860.87 was both added and removed.
This report section is for Amazon to record that your customers paid sales tax when they purchased your product and that Amazon remitted it to the appropriate states. Amazon legally must do this in most states.
However, your 1099-K will include this same customer sales tax as if it were part of your revenue. Which means, if you didn’t do your accounting correctly, the IRS will think you owe tax on your customers’ sales tax because you didn’t tell them that’s what it is.
Outstanding bookkeeping and accounting. By the way, check out this post for everything else you need to know about sales tax for your Amazon business.
If you are dead serious about changing your future, Just One Dime can help. We offer personalized and group coaching for all of your accounting, and otherwise, questions, along with a dedicated community of sellers, and so much more. Visit JOD.com/freedom to find out if we are the right fit to help you achieve your goals.
Do you secretly nerd out about accounting like me? Let me know in the comments.