1. I am not a tax professional, lawyer, and have never worked for the IRS. Go to a tax lawyer if you need answers on a legal level.
2. The information I’m going to share with you is only relevant if you’re selling in the US. Some of it will overlap if you’re selling in Canada, or even the UK or Germany, but for the most part, it’s only relevant to the US. I have sold in other countries, but my knowledge is much stronger when it comes to the US because I’m an American-born citizen.
Having said that, let’s go over these top nine questions, and I hope the answers are helpful to you.
1. Does Amazon require me to collect sales tax?
There are two sides to taxes on Amazon: paying taxes and collecting taxes. For this question, the answer is currently that Amazon does not require you to collect sales tax.
2. Does the state require me to collect taxes when selling on Amazon?
I’m going to quote the words of a tax lawyer here: “Yes, when your business has a presence in the state significant enough that you’re required to comply with sales tax law.”
That answer is very vague and fuzzy because that is the truth: it is vague and fuzzy. At what point does the state require you to pay taxes? Some states require you to renew a tax license or a sales permit every year. Some require you to collect taxes on both the cost of the product plus the shipping cost, while others only on the product itself. The rules for states vary greatly, so it’s your job to find out what your state requires.
Amazon won’t enforce this. You have to find out what your state laws say. What I did is I went directly to a tax lawyer to find out all my options, being an online retail business, because I want to make sure I’m honoring the law.
3. If I do collect taxes, do I collect them at the tax rate of the state I’m shipping from, or the state that I’m sending the product to?
This is a very big question, because it can get confusing. There are two kinds of state sales tax laws: origin-based and destination-based.
Texas is an origin-based tax law state. I’m selling and shipping from Texas, so I have to collect taxes on the Texas 8.25% tax rate.
However, if I live in Alabama, a destination-based tax law state, and I’m shipping to someone in California, I’m going to charge California’s tax rate.
Origin-based states charge at the rate of the seller’s location, while destination-based states charge at the rate of the buyer’s location. 38 out of the 50 states are destination-based, while the other 12 are origin-based.
4. What is sales tax nexus?
This is super important if you want to understand your tax laws. Sales tax nexus just means presence in a state. So if you are living, shipping from, and running your business in Georgia, your sales tax nexus is in Georgia. Therefore, you’re bound to Georgia’s state tax laws.
However, let’s say you have inventory in California. You’re running your business from Georgia, but you ship inventory from your warehouse in California. Now you have a sales tax nexus in both Georgia and California.
Let’s say your uncle decides to work for you, and he lives in Washington. Now you have a sales tax nexus in three states, because he’s working for you in the same company. You now have three different states whose tax laws you have to honor.
5. How do I set up my Amazon account to collect taxes?
Hover over “Settings” in Seller Central and then click on “Tax Settings.” It will take you to the Tax Calculation Set Up page. From there, hit “Continue”, and it will give you an overview of how to collect sales tax through Amazon. Once you’ve read through it, hit “Continue” again. It will lead you to a tax codes page.
You need to copy or write down the code for each type of item you’re selling. If you’re selling general clothing, or athletic shoes, or home improvement items, you have to get each code. You’ll need this so you can insert it into your store to make sure you’re collecting taxes based on that product category. After you’ve collected all the codes you need, hit “Continue” again.
It’ll take you to a page where you can actually set up your tax information. First, it will give you a bunch of data, but you can scroll down to start entering information. You can click on what region you’re setting up taxes in: so state, county, city, district, etc, per state.
These are based on what states you have a sales tax nexus in. Then on the right side, you click have the option to click Taxable or Nontaxable for shipping and gift wrapping charges. This is based on your state: some will collect taxes on shipping charges and some won’t.
You can type in a custom rate per state if you want. Then you also have to put in your state registration number for when you register to do this. Once this is done, hit “Review Changes”, you can review your entries, then submit.
6. Does Amazon report my income to the IRS?
If you make over $20,000 a year in total revenue, yes. Keep in mind that customer returns are not included in this: Even if your revenue dropped because you refunded customers for returns, they will still count this as part of your revenue.
Amazon will send you a 1099-K form. The only thing you have to do with it is report that information when you file taxes for the year. I pay a tax accountant to do this for me.
Amazon will send you an email with very specific instructions on how to access your form in Seller Central. You go into Seller Central, download the form as a PDF, and I highly recommend printing it out and keeping it. Now you have the total revenue you made. You will take that form and use it to calculate how much you made for the year if you file your own taxes, or send a copy of it to a tax accountant so they can do it for you. Amazon will send it to you before the 31st of January of the following year.
To find this in Seller Central, go to “Reports”, then click on “Tax Document Library.” Make sure your tax year is accurate. You can download a PDF right on that page. If you’re not seeing anything, just click “Generate A Tax Report” and they will send it right over to you.
7. Who is required to submit tax information?
Whether you are a professional or individual seller, if you have more than 50 transactions a year, regardless of volume, you have to submit a tax form so Amazon can send you your 1099-K. Once you’ve had 25 transactions, Amazon will send you a little alert on Seller Central that you need to fill out your tax information. This is very important, because if you hit more than 50 transactions and you don’t fill it out, they will suspend your account.
8. Do I need a tax identification number?
Absolutely. If you are a sole proprietor, all you have to do is put in your social security number. A sole proprietor is someone who has not incorporated the business. They are a one-man show. It’s all one person, you are the business, so all you have to do is give your social security number. It’s the easiest, fastest, and cheapest way to do it if you’re just setting up your business. However, you have a lot of liability. If someone came around and sued you, you could lose your house, your car, your assets. They’re not protected.
That’s why I am a LLC, a Limited Liability Company. When I started off, I couldn’t afford the fee for an LLC, so I became one later. That means that if someone tried to sue you, your personal assets are protected. They can not touch your personal savings, your house, your car, or personal investments. Anything business-related they can sue. This also gives you a lot of freedom and flexibility that you wouldn’t have if you are a C-Corp, an incorporated company.
If you are a corporation, you have to have regular quarterly documents verifying you’ve had meetings with all the members of your board. There are a lot more legal requirements as a corporation. As an LLC, you don’t have to worry about that. However, as either an LLC or corporation, you have to give Amazon your Employee Identification Number (EIN number).
This is very important. You will get this when your register your company with the IRS. They give you a number that identifies you as a company, so that when you pay your taxes, you’re paying them not only personally, but also as a company.
Don’t let that freak you out. If you own a business, your ability to have legitimate and legal write-offs is unbelievable. I’ll walk you through some of that, but just remember, when you’re setting up your tax form on Amazon, give them your social security number or your EIN number. Once they validate it, you are good to go.
9. What count as tax write-offs?
If you made $500,000 in total revenue on Amazon in a year, you have to pay a percentage of that, (around 33-40%) on your tax income. That’s a lot of money. You worked hard for it, you don’t want to pay that much. However, if you spent $200,00 that year on business expenses: the computer you bought for the business, the keyboard, the trackpad, the cell phones, the inventory, the samples, the shipping cost, the learning materials: all of that is a tax write-off.
Keep your receipts. If you made $500,000 in revenue, but spent $200,000 in business expenses, you will now be taxed a percentage of $300,000 instead. You will spend a lot less money in taxes; that is why I love running a business.
To do this legally, you have to truly make sure it is a business expense. But if it is, it is well worth the time spent.
Any time I have an expense, I print off those receipts, put them in a box, and actually pay someone to drop them in a spreadsheet for me. Then I’ll have the totals ready for my tax accountant. I’ll give you some examples of the types of business expenses I record.
Advertising: Any time I run ads, on Amazon or Facebook or elsewhere.
Contract Labor: If I hire someone to work for me or my business.
Dues and Subscriptions: If I sign up for a tool or subscription, like a keyword tool, business magazine, or a program.
Legal and Professional Fees: The money I spend having someone do my taxes for me, fees to setting up the company, lawyer and accountant fees, or getting trademarked.
Materials and Supplies: Anything I need for my company, like a computer or keyboard, the machines I need to help me work.
Meals and Entertainment: Anytime I take someone to lunch and talk about business that counts as a business expense. Getting food or drink on an airplane ride while going to talk to a potential client or business parter and hotel costs also count. You can go on some really cool trips, on your company’s bill, and it will count as a legitimate tax write-off.
Medical: This one is not from a business perspective, but any time there are medical needs, they could as a tax write-off. So if you have to pay medical bills, write them off, you should not be taxed for those.
Office Supplies: Things like printers, ink, paper, staplers, or packaging supplies.
Postage: The postage costs for shipping off items through USPS or UPS or FedEx.
Supplies: This is inventory; when I purchase products from my supplier in China or Pakistan or somewhere else.
These can seem small at first, but they add up very quick. It’s kind of scary to think about how much you end up spending. Just make sure to get receipts for them all and record them for your tax accountant.
I hope these answers have been helpful to you in building passive income. Let me know you I can help you. Have an awesome day.