Amazon Income Tax Guide: What You Need to Know
Estimated reading time: 8 minutes.
Most Amazon sellers bring in around $1000-5000/month in revenue, with around 6% making upwards of $250,000.
Even after the costs and fees hidden behind those figures, that’s some substantial income.
“Income” doesn’t just mean “salary”. A one-off garage sale worth $200 is technically income. It is simply money received, usually in exchange for goods and/or services. Selling on Amazon very much qualifies as an income source.
For this reason, Amazon sellers could be liable to pay tax on their Amazon income. And if they don’t, they are considered just as non-compliant as anyone else working and avoiding taxes.
So, who is eligible to pay Amazon taxes and how much? Is income tax different to sales tax? How should sellers manage both - is there an easier way? And how about deductibles, any opportunity to save cash too?
In this article you’ll find everything sellers need to know about Amazon income tax in the US:
Table of Contents
Let’s get stuck in.
Getting Acquainted with Income Tax
Federal income tax as we know it today was officially enacted in 1913, to help fund WWI.
In the beginning, it was the states who collected taxes, but this was handed over to the Office of the Commissioner of Internal Revenue: the early version of our IRS.
In 2020, $3.42 trillion revenue was collected in the US, of which income tax accounted for $1.61 trillion (or 47%). For perspective, corporate taxes accounted for only 6%. Average American citizens are a major government currency.
What is all of that money spent on?
Agriculture, defense, medicine, education, energy, homeland security, justice, social security - the list goes on. The things that help a country function need funding, and this is where a chunk of our salaries and wages go each month.
So, who pays income tax, and how much?
Everyone that earns income should pay some form of income tax, barring any exemptions (or deductions as they are now categorized). The rate paid is defined by two things: how much you earned in the relevant tax year, and whether you are married.
Rates start at 10% and go up to 37% for the highest earners.
Income tax and sales tax are not the same thing. Sales tax is applied to certain transactions, paid by the buyer and remitted either by you or Amazon to the applicable state. Income tax is all you - that comes out of your pocket.
Amazon Income Tax and Who Pays
Amazon FBA income (and non-FBA), is taxable. This means that you do have to report Amazon sales on your taxes.
Some ecommerce sellers might sell online as a hobby - it’s not a professional thing or a business that sustains them. Amazon is not typically the platform these people use, so if you’re an Amazon seller, you’re probably meeting the IRS criteria for declaring Amazon income on your taxes.
As a general rule of thumb, if you’ve earned more than about $600 from Amazon, you should declare it.
The process of reporting Amazon sales for income tax purposes is not something that Amazon will handle for you - unlike collecting and remitting sales tax in some of the US states.
Amazon Tax Forms and What You Need to File Them
So now that you know you probably do need to report your Amazon sales for income tax purposes, what’s next?
In the eyes of the IRS, an ecommerce seller counts as an “independent contractor/freelancer”. As such, the below forms will be relevant to you*.
*The below information was correct at the time of publishing this article for most sellers. For the most applicable route which may be unique to you, please ensure you check the latest IRS requirements, or better yet, talk to an accountant. Don’t have one? You can find an ecommerce specialist here.
The Amazon tax documents you will (most likely) need
This is for: US taxpayers to file their annual income tax return.
What you will need to complete it: Your personal information and social security number, as well as any dependents, tax credits, deductions or disability credits that you might be able to claim. A calculator might also come in handy!
For more help on filing this form:
This is for: A sole proprietor to report income or loss from their business.
What you will need to complete it: A breakdown of your business’ profit and loss, its expenses, costs of goods sold, and any information relating to tax deductible expenses you might have.
For more help on filing this form:
This is for: Amazon has a Payment Settlement Entity (PSE) which will tell the IRS you have exceeded a certain revenue threshold. It does this by sending you a report that you need to check before it is sent on. This is the 1099-k.
What you will need to complete it: You will need detailed information about your sales and financials to ensure the PSE has captured everything correctly. Everything must match your own records.
For more help on filing this form:
- IRS instructions for form 1099-k
- Understanding your form 1099-k
- General instructions for certain information returns
- General overview of form 1099-k
A little more information on tax form 1099-k
As an independent business owner, you might have heard of this form before. It was actually introduced as part of the 2008 Housing Assistance Tax Act and ensures that online sellers are meeting their tax obligations as retailers.
The 1099-k form is first filled out by Amazon’s Payment Settlement Entity (PSE) which is legally obligated to inform the IRS of sellers:
- Making over $20,000 in revenue, or
- Processing over 200 transactions
The PSE fills out the form based on the information it has about your sales activity, but you need to check these records and ensure they match your own before filing the form. Your tax identity information must be provided to Amazon before you can start selling, you cannot sell on Amazon without tax ID.
What does this all mean for you as a seller? It means that you can’t hide from the IRS. If you meet the above criteria, Amazon will notify them and you’ll be on the radar.
The best thing you can do is maintain detailed, accurate financials so you can ensure any Amazon tax reports on your business are correct. This is where A2X can help.
What Can You Deduct From Your Amazon Tax?
Tax deductibles are expenses that you can include on your income tax return which may be refunded to you (the tax portion, that is).
Eligible expenses are usually things that your business requires to function. The purpose of refunding people the tax they’ve paid on these essentials is to incentivize business ownership.
Now before we get into the types of expenses that are eligible, it’s important to point out that in order to claim tax back, you must have robust financial records. Keeping all your receipts is just step one; accounting software and the services of A2X are the best way to ensure you have everything accurate and at your fingertips.
Tax-deductible expenses which the IRS allows
- Inventory-related costs.
- Inventory-related storage solutions (e.g. bins, boxes, shelving).
- Storage unit fees.
- Office supplies and stationery.
- Office furniture.
- Devices and technology.
- Repair costs for business equipment (like computers, printers etc).
- Laundry products.
- Shipping suppliers.
- Mileage for job-related trips.
- Other business-related travel expenses.
- Educational resources relevant to your business.
- Professional services for your business (e.g. accountant, attorney).
- Bank account fees.
- Subscriptions for your business.
- Business coaching or mentoring.
Tax mistakes can be costly, and getting it right can save you a lot of money, so it’s worth taking the time to nail it.
We highly recommend recruiting the help of a specialist ecommerce accountant. They will be able to offer you the best tailored advice to protect your business and meet your obligations. Find yours from our trusted accountant directory here.
Only Pay What You Owe With A2X for Amazon
Accurate, detailed financial records are crucial not just for tax time and filling in forms like those mentioned above, but in order to understand how healthy your business truly is. If you don’t know where your money is going or coming from, how can you plan for growth?
When you integrate your accounting software and Amazon account, you get automatic transfer of transactional data between them. That’s great, but it’s only a small step.
That data arrives to you individually and unorganized. Bank deposits comprise multiple line items like the price of the item, sales tax collected, any returns received, shipping and fulfilment costs paid, Amazon fees - the list goes on. All you see is one figure.
A2X solves this critical problem for Amazon sellers.
When you connect A2X to your stack, you will have automatic journal summaries for each deposit, with all those line items above split out for you. No manual calculations, no confusion at tax time: just seamless, stress-free accounting.
Plus, A2X organizes your accounts via the accrual method, which means that order data is captured as it occurs which gives you a far more dynamic view of your cash flow than you would have otherwise.
Check out how it works below and start your free trial today!
Also on the blog
- The A2X Amazon Accounting Hub
- The Definitive Guide to Amazon 1099-k Reports for Amazon Sellers
- The Ultimate Guide to Amazon Sales Tax
- International Tax Planning for Amazon Sellers in the US
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
- Buyers’ Guide to Amazon FBA Automation
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