Registering for Federal and State Taxes, and Tax ID Numbers
Q: "Do I need a federal tax ID number to sell on eBay?"
A: If you have a partnership, corporation, or limited liability company (LLC) for your business selling on eBay, you are required to obtain a federal tax ID number. You can't use one of the partners' Social Security numbers as a tax ID.
If you are a sole proprietor, or an LLC with only one owner (called a member), the IRS allows you to use your Social Security number as a federal tax ID number. But I think it's a lousy idea—get a federal tax ID number anyway. Why? Because when you're in business, you have to give this number out to many, many people. For example, if you take consignments of goods for sale on eBay, you have to send IRS Form 1099 to each one of your consignors (the people who consign goods to you) at the end of each calendar year. Each of those forms will have your tax ID number on it. Do you really want all of those people to know your Social Security number? Enough said.
To get a federal tax ID number, fill out IRS Form SS-4, available as a free download from irs.gov. You can fill out the form online or print it out and call the IRS's toll-free telephone number (1-800-829-4933) to get a tax ID number over the phone. Even better, have your accountant fill out the form for you—that way, you know there won't be any mistakes, and most accountants I know won't even charge you for this service. They want your tax return business, and filling out this form properly makes their lives a lot easier down the road.
Q: "What's the biggest mistake eBay sellers make when they set up their businesses?"
A: Failing to register for state and local sales taxes, and getting a state tax ID number (often called a resale number).
When you set up a business in just about every state in the United States, you are required to fill out and file a business tax registration form with your state tax authority. At the very least, every eBay seller needs to register for state sales and use taxes.
The easiest way to register for sales and use taxes is to have your accountant fill out the form for you. Most accountants will do this without charge because they want to get your tax return business, and filing this form properly makes their lives a lot easier down the road.
If you want to do this yourself, you first have to find the website for your state tax authority. Go to taxsites.com/state.html for a directory of state tax websites, and click on your state. Once you have found your state tax authority's website, click on the Forms and Publications link, and look for your state's business tax registration form.
Q: "Are there any other state and local taxes eBay sellers have to worry about?"
A: In some states, municipalities have the power to levy their own income taxes on corporations, limited liability companies (LLCs), and other business entities. So, for example, in New York City, corporations and LLCs have to pay income taxes to both the state and city governments.
Many states also levy a minimum tax on corporations and LLCs, regardless of the amount of income earned. So, for example, Connecticut imposes a minimum yearly tax of $250 on domestic corporations and LLCs, even if they didn't make a penny of income during the year.
Some states impose a personal property tax on business equipment and inventory. This is calculated the same way as your real estate property tax—you determine the value of your taxable property, then apply the mill rate ($XXX for each $1,000 of property value) to determine the tax owed.
A few states (dwindling in number) impose inventory taxes or floor taxes on a retailer's year-end inventory. To determine the tax owed, you conduct a physical inventory on December 31, determine your inventory value on that date, and apply the state's tax rate to the value. Usually, there is an exemption from tax for goods sold in interstate commerce, which should apply to most inventory sold by eBay sellers. Hint: If you live in a state with a floor tax, put everything up for sale on eBay during the month of December with a $0.01 starting bid and no reserve.
