Calculating Your Cost of Goods Sold (COGS)

Q: "When I determine how much money I made on eBay, do I simply subtract the eBay and PayPal fees from the winning bid amount?"

A: No, I'm afraid it's a little more complicated than that. What you have to do is calculate the cost of goods sold (COGS) of the item you sold on eBay. For most items, your COGS will be the following:

• What you paid your vendor or supplier for that specific item, plus

• The sales taxes (if any) you paid to the vendor or supplier of the item, plus

• Any storage fees for that item, plus

• Your packaging and shipping costs for that item, to the extent (and only to the extent) these are not reimbursed by the buyer, plus

• Your insurance costs for that item, to the extent (and only to the extent) these are not reimbursed by the buyer, plus

• The sales taxes (if any) you are required to pay upon the sale of the item on eBay, to the extent (and only to the extent) these are not reimbursed by the buyer, plus

• Your eBay, PayPal, and other selling fees and commissions

Total these amounts for each item, and then subtract the total from the price the buyer paid on eBay, and—voila!—you have your net income for that item.

Note that you have to make this calculation on an item-by-item basis. If you are selling lots of stuff on eBay, it's best to invest in some software that will help you determine your profit on each eBay sale, such as Corey Kossack's Profit-BuilderSoftware (profitbuildersoftware.com).

Partnership Tax Issues

Q: "I have been selling on eBay for the past few months. My spouse helps me out a little bit by keeping the books and occasionally driving packages to the UPS Store, but I don't pay her anything for it. Obviously, everything we make goes into our joint bank account. Do we have to file our taxes as a partnership, or can I just file a Schedule C?"

A: Generally, you file taxes as a partnership if two or more people are sharing in the profits and losses of a business. If you're a partnership, you file an information return on IRS Form 1065 each year, although many accountants think this isn't necessary if the only partners in the business are a husband and wife and each partner reports his or her pro rata share of the partnership income on Schedule C when they file their Form 1040 each year.

If you treat yourself as a partnership for tax purposes, then each of you is jointly and severally liable if the partnership gets sued. This means that if you make a mistake selling something on eBay, the buyer can sue both you and your wife, even though your wife had nothing to do with the business or the mistake you made. This is not a good thing.

Since this is primarily your business, you probably shouldn't treat it as a partnership for tax purposes because of the risks involved. I recommend that you talk to an attorney about the following:

• Have your spouse sign a document stating clearly that she has no interest in your business (this will be a lifesaver should you ever get divorced).

• Pay your spouse a reasonable fee for the services she performs for the business, and be sure to send her Form 1099 (see Chapter 20) if you pay her more than $600 total during the calendar year.

• Get a federal tax ID number for your business and open a separate checking account for it—no more commingling of funds in the family bank account.

• File Schedule C as a sole proprietor when you prepare your income tax return at the end of the year.

eBay Certified Education Specialists and eBay Certified Business Consultants

Q: "I am an eBay Certified Education Specialist and teach eBay classes at local colleges and adult education programs. What kind of tax form do I need to fill out for this? How do I pay taxes on revenue I generate through teaching, lectures, and private training sessions?"

A: For those who don't know, an eBay Certified Education Specialist is someone who has been trained by eBay (for a fee) to conduct adult education and other classes that teach other folks how to sell on eBay. (If you're interested in becoming one, go to poweru.net/ebay for details.)

An eBay Education Specialist has to pay income taxes, just like anyone else, on the income from teaching classes, less expenses for training, instruction books, and other teaching-related costs. If you are a sole proprietor, you have to fill out Schedule C (income or loss from a trade or business) each year and pay your taxes on April 15. If your tax liability is more than $1,000 in any given year, you have to estimate your income taxes four times a year (by April 15, June 15, September 15, and January 15) and pay them in quarterly installments using IRS Form 1040-ES.

The good news is that in virtually all states, educational activities are exempt from state and local sales and use taxes. The bad news is that in many states, if you are using the word education or some variation in your company name, you have to get permission from your state education department to do so. Check with a local attorney to find out if this is necessary in your state; if it is, you have to pay a small fee and wait several weeks to get the education department's certificate authorizing you to represent yourself as being in an education-related business.

Consignment Sales and Drop Shipping

Q: "If I am taking goods for sale on consignment (for example, as an eBay Trading Assistant), do I have to pay taxes on the full value or on just the portion that I keep?"

A: You pay income taxes only on the portion you keep under your agreement with each consignor. Because this is a sales commission and in a consignment sale you never take title to the item, you have to report this income at (currently) unfavorable ordinary income tax rates as compensation. Your consignor has to pay income taxes on the amounts you remit to him or her after deducting your commission. If you remit more than $600 total to a consignor during the calendar year, you must send the consignor Form 1099 within thirty days after the year ends (i.e., by January 31).

Q: "How do you handle income taxes when you are dealing with a drop shipper on eBay?"

A: Basically, the same way you would handle income taxes for consignment sales. You pay income taxes only on the portion you are allowed to keep under your agreement with the drop shipper. Because this is a sales commission and in drop shipping you never take title to the item, you have to report this income at (currently) unfavorable ordinary income tax rates as compensation. Since the vast majority of drop shippers are corporations or other legal entities, you probably don't need to send them Form 1099 at the end of each year the way you are required to do for individuals who consign goods to you for sale on eBay.

Will eBay or PayPal Rat You Out to the IRS?

Q: "Does eBay report member sales or earnings to the IRS?"

A: Not yet. At present, eBay has said that if they receive a subpoena for information, they will honor it (so would PayPal), but to my knowledge no such subpoena has ever been issued. The IRS has an informative discussion of this issue on its website, irs.gov (go to the home page and type "online auction" in the site's search engine).

Whether or not it is reported to the IRS by another party, if you have gain or profit from selling on eBay, you are required to report it as income and pay income taxes on it. As this book is going to press, the IRS has drafted a new version of Form 1099-MISC and plans to require eBay to issue it to you if you have more than one hundred sales or more than $5,000 in auction bids during the calendar year. This may change, however, by the time this book is published. Talk to your accountant or tax adviser, or check the IRS website, for more up-to-the-minute information.

 
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