Online Hobby Sales Income
If you are an online seller through online sales websites like Esty, eBay or Amazon, you may have to report the sales as income. The Internet Tax Freedom Act prohibits the taxing of access to the Internet. The Act does not apply to tax on income from online sales or use tax on purchases made online. Most individuals mistakenly think that this law exempts income from Internet sales from income tax. However, online sales are considered taxable income in California. As a California resident all income is taxed, regardless of source, within and outside of the U.S.
According to IRS your hobby income must be reported as “hobby income” if the sales are not intended to produce a profit. One of the provisions is that you have not made a profit from the hobby in 3-5 consecutive years. If your hobby income is deemed as a hobby you can deduct expenses however the deductions cannot exceed the gross sales or use hobby losses to offset your income.
If you are not sure whether your online sales is operating as a hobby or for profit. IRS guideline questions list below will help you determine if your activity is a hobby or a business. Answering “Yes” to any of these questions your online hobby sales is a business.
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Online Sales as a Business
If you operate an online business, with the intent of making a profit you will need to report your income and may be entitled to deduct business expenses. Overall, you may deduct certain business expenses incurred in operating your business. As well as possibly home office deduction if you meet both of the following conditions. 1. Use of home must be “exclusive and regular” 2. Part of your home must be one of the following: Your principal place of business, Place where you meet with customers, or A separate room you use for your business.
Make sure you are keeping track of your expenses as well as your income throughout the year so you are prepared to complete your business income taxes.
If you are a California resident and sell items on online as a business you are considered as a “retailer” and need a seller’s permit. A “retailer” is defined in the law (section 6019 of the Sales and Use Tax Law) to mean, among other things, every individual or firm making more than two retail sales of tangible personal property during any 12-month period. A seller’s permit allows you to collect sales tax from California customers and report those amounts to the State Board of Equalization. For more information, go to the California Board of Equalization website at www.boe.ca.gov.
Online Garage Sales
You typically do not have to report sales if you occasionally sell used personal items like in a garage sale. Plus, if you paid more for the items than you sold them for, the sales are not reportable and any losses on personal use property are not deductible. If your online garage sale develops into a business and/or you have recurring sales and purchase items for resale with the intention of making a profit, you may have started an online auction business. For more information, go to the California Board of Equalization website at www.boe.ca.gov.