Income Taxes and Self-Employment Taxes (FICA and Medicare)
Q: "What is the minimum limit for filing income taxes when you sell on eBay?"
A: Zero. I'm not kidding. There is no minimum amount of income you can earn on eBay without having to pay taxes. If you make even $1 in profit (income) selling on eBay, you have to pay taxes on it at your current tax rate.
There are three dollar amounts you need to be aware of when you sell on eBay:
1 . If you make even $1 of profit selling on eBay in a given calendar year, you have to pay income taxes to the federal government (and your state government as well, if your state has an income tax).
2. If you make $400 or more of profit selling on eBay in a given calendar year, you have to pay self-employment taxes (FICA and Medicare) in addition to your income taxes.
3. If you have a tax liability of $1,000 or more from your eBay selling activities in a given year, you have to estimate your income and self-employment taxes and pay them in four quarterly installments (by April 15, June 15, September 15, and January 15) rather than in a lump sum by April 15 each year.
Q: "Do I really have to pay self-employment taxes such as Social Security when I sell on eBay?"
A: Yes. If you make more than $400 in profit (income) in a given calendar year, you have to pay self-employment taxes (FICA and Medicare) to the IRS in addition to your federal income taxes. If your state has an income tax, you may have to pay similar amounts to your state tax authority as well. For more information, see IRS Publication 334, Tax Guide for Small Business, or IRS Publication 4591, Small Business Federal Tax Responsibilities.
Q: "When do I have to pay estimated taxes?"
A: When you have $1,000 of tax liability from self-employment activities (if you're making $5,000 or more in profit from eBay sales, you're getting close to this requirement and should talk to an accountant or tax adviser), you no longer can wait until April 15 each year to pay your taxes. You will have to estimate these and pay them in quarterly installments (the due dates are April 15, June 15, September 15, and January 15).
There are two ways to calculate your estimated taxes:
1 . The safe harbor method. Take your tax liability last year (the amount you actually paid the IRS, not the amount of income that was subject to tax), add 10 percent, divide by 4, and pay that amount on each of the four payment dates.
2. The SWAG method (for "scientific wild-assed guess"). Sit down with a pencil and paper the day before each payment date, make your best calculation of how much you actually owe the IRS in taxes for that quarterly period, pay that amount, and pray to the Almighty that you're right at the end of the year.
Here are two (simplified) examples of estimated tax calculations:
• You paid the IRS $40,000 in taxes last year and want to use the safe harbor method this year. Take 10 percent of $40,000 ($4,000), add it to the $40,000 ($44,000), divide by 4, and pay the IRS $11,000 on each of the four payment dates.
• Your gross sales from eBay were $80,000 for the past three months, and you had $30,000 in eBay-related expenses during this same period. Using the SWAG method, report $50,000 in eBay business income and pay taxes on it using your current tax rate, hoping that your future sales on eBay will not throw you into a higher tax bracket for the year.
Calculating estimated taxes is extremely complex and difficult, and the preceding discussion merely grazes the surface of the IRS rules regarding estimated taxes. For more information, read IRS Publication 505, Tax Withholding and Estimated Tax, which is available as a free download from the IRS website at irs .gov. Then hire an accountant or tax adviser to help you with the calculations.