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What You Need to Know About Taxes as an Amazon Seller

While online sales don’t give you the same satisfying “cha-ching” sound as a traditional brick-and-mortar cash register, every sale is a small victory for your business. But just making a sale doesn’t mean your work is over. In addition to reporting earnings to the Internal Revenue Service, retailers must also collect and submit sales taxes in many cases.

If you’re an Amazon seller, you’ll get some help managing sales taxes, but you still have to file and report tax forms with any relevant tax authorities for your business. Here’s a closer look at how to file taxes as an Amazon seller with tips to make the process as straightforward and easy as possible.

How to report and file taxes as an Amazon seller

Before we get started, a note: sales taxes paid to state and local governments are not the same as business income taxes.

Sales taxes are based on revenue, while income taxes are based on profits and are paid to the federal government through the Internal Revenue Service (IRS) and possibly to a state government.

Collecting and filing sales tax

Amazon sellers choose between two plans when setting up their accounts: Individual and Professional. You must be a Professional Seller to collect sales tax on Amazon, and if you are, Amazon will automatically calculate, collect, and remit sales taxes for you.

However, you’re still responsible for tracking and reporting your sales taxes and correcting any differences. You can log into Amazon Seller Central to find reports containing your sales and sales tax details.

1099-K tax form from Amazon

If your business makes at least $20,000 in sales and 200 transactions per year, Amazon will send you a 1099-K tax form. The 1099-K is used in preparing your taxes and contains tax information about payment card transactions and third-party network transactions. Even if you don’t get the form, you’re still required by law to make sure your business pays the correct amount.

Learn more: Form 1099-K: Why You Need It and Where to Find It

State and local sales taxes for Amazon sellers

Before reporting, you may have to file for a business tax certificate or license for each jurisdiction. While this can be tedious, it’s required by law if you want to sell to customers living in those areas.

Learn more: Does Your Online Store Need a Business License?

Filing annual income tax returns as an Amazon seller

Most businesses will file income taxes using Schedule C on their personal income tax return or Form 1120 for partnerships and S corporations.

  • Form 1040: Form 1040 is how individuals file a federal income tax return with the IRS. It’s used to report your gross income—the money you made over the past year—and how much of that income is taxable after tax credits and deductions.

  • Schedule C: Schedule C is an addition to your 1040 annual tax return and includes a summary of your business results, with tax details that pass through to your personal tax return. This is the business tax filing method used by sole proprietorships and many LLCs.

  • Form 1065: Partnerships report taxes using IRS Form 1065. In this situation, owners should also receive a personal income tax form called a K-2 or K-3, showing their portion of profits for tax reporting purposes.

  • Form 1120 and 1120S: If your business is a C corporation or an LLC that files as a corporation, you’ll need to report taxes using Form 1120. S corporations use Form 1120S. As an owner, you’ll also get an additional K-1 form to report income on your personal tax return.

When does an Amazon seller need to charge sales tax?

Sales tax laws often depend on several factors, including various state and local regulations. One issue to be aware of is whether or not you have a sales tax nexus in a particular state.

A sales tax nexus is a legal term for making enough sales or having a presence in a specific region. To qualify as a sales tax nexus, businesses typically need to meet a specific minimum sales threshold in the region. If you have a physical presence, staff, or maintain inventory in a state, you also likely have a sales tax nexus in that jurisdiction.

Sales tax nexus for FBA sellers

When Amazon sellers use FBA, or Fulfillment by Amazon, they can ship their products to Amazon warehouses for customer fulfillment.

For example, suppose you’re fulfilling your own orders, and your business is based in Massachusetts. In that case, a customer in California will have to wait longer to receive their order than a customer in Pennsylvania. When you use FBA, though, Amazon may store and ship your goods from warehouses in both California and Massachusetts, so neither customer has to wait to receive their goods.

FBA can be great for both customers and sellers—customers can get the products in their hands as fast as they would any other Amazon product, while you don’t have to worry about managing ecommerce logistics like packing, shipping, or returns.

However, as in our example above, if you use FBA, your products may be stored in several different states. Therefore, the inventory Amazon stores on your behalf could mean that you have sales tax nexus in a state without even realizing it.

Amazon FBA sellers may have a tax nexus in any of these states where Amazon fulfillment centers are located:

  • Arizona
  • California
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Indiana
  • Kansas
  • Kentucky
  • Massachusetts
  • Maryland
  • Minnesota
  • North Carolina
  • New Hampshire
  • New Jersey
  • Nevada
  • New York
  • Pennsylvania
  • South Carolina
  • Tennessee
  • Texas
  • Virginia
  • Washington
  • Wisconsin

If you want to find out where Amazon FBA gives you sales tax nexus, our friends at TaxJar have prepared a handy step-by-step guide to finding this information in your Seller Central account.

No matter what state you sell in, though, it’s essential to understand what is and isn’t taxable in that state, city, and county. Some states have low taxes on life necessities like groceries and clothing, and some states don’t charge sales tax at all. With 14,000 tax jurisdictions nationwide and 3,000 unique product categories in the Amazon catalog to worry about, you must track and file your taxes accurately to avoid penalties.

How to collect sales tax as an Amazon seller

If you must collect and remit sales taxes, the first step is typically to register with the state’s tax authority and figure out how often you’ll have to file and pay. “I didn’t know I had to pay in that state” isn’t a good excuse when the tax collector comes calling.

Here are links to state tax authorities in the most populated states in the U.S.:

Lucky for business owners, Amazon collects and remits sales taxes in many states for you automatically. You can see these details in your Amazon sales reports. Login into Amazon Seller Central and navigate to the Tax Settings menu to view your current sales tax collection settings and make specific selections at state and local levels.

You should also set up your product-specific tax codes for Amazon sales to ensure accurate collections. For example, you may have a higher tax rate on some products. If you under-collect on sales taxes, you may have trouble if asked to pay the difference. You also don’t want to accidentally charge sales tax where none is required, such as selling apparel or clothing in Minnesota.

Deductions for ecommerce businesses

While there’s not much you can do to influence sales tax rates and payments, you can work to minimize your overall tax bill as an ecommerce business. You can legally lower your tax obligations by taking advantage of every possible tax deduction. Virtually every dollar you spend directly on your business counts, but exceptions exist.

Note: Tax deductions are expenses that lower your taxable income. When you lower your taxable income, you’ll owe less in taxes.

Here are some of the most common deductions for ecommerce businesses:

  • Shipping: Shipping costs to get your products to your facility, Amazon, or customers are tax-deductible.

  • Packaging: Boxes, shipping labels, padding, and tape are among the most common costs related to packaging.

  • Work locations: Your office location and any other physical locations you maintain are a significant source of tax deductions. That includes rent or mortgage payments, insurance, utilities, and costs to maintain or upgrade your workspace.

  • Software and utilities: Online businesses often rely on website hosting and a suite of tools to help you with various parts of your business. From ordering to shipping to tax calculation tools, direct business expenses for software are tax-deductible.

  • Banking, payment, and insurance costs: While savvy business owners work to limit banking and insurance costs, nearly all ecommerce businesses pay something for payment processing, banking, and other financial account and services. Any insurance expenses are also deduction-worthy.

  • Marketing expenses: Online advertising with Google, Facebook, Instagram, and Amazon offers a high return on investment for some businesses. Others may prefer print ads, billboards, radio, podcast advertising, and other marketing techniques. If you pay for any marketing or advertising for your products, they count as deductible marketing expenses.

  • Education: If you take classes or courses to build your business skills or pay for employees or contractors to do so, it’s likely tax-deductible. Classes don’t have to be from a major college or university—even online courses count as business education costs.

  • Business conferences and travel: In addition to conference fees, you can write off the cost of airfare, hotels, and ground transportation for the event or meeting.

  • Professional services: Your accounting firm, lawyer, and other professionals required for your business may be a critical part of your team. Fortunately, these are also deductible costs for your company.

These costs should be fully tax-deductible outside of certain dining and entertainment expenses. When in doubt, check with your accountant or Bench Tax Advisor to ensure the deduction applies to your business.

How Bench can help

Bench can play a critical role in preparing your annual tax returns and tracking your business finances every month. Bench works with thousands of ecommerce merchants to provide the perfect combination of bookkeeping and tax preparation services for business owners like you.

And while Bench doesn’t offer sales tax services, Amazon sellers can take advantage of our partnership with TaxJar, a company entirely focused on sales tax compliance.

TaxJar plugs in to your ecommerce platform of choice, including Amazon, BigCommerce, or Stripe, to process your sales data automatically, so you don’t have to worry about missing anything or making manual mistakes.

Bench customers get access to monthly business reports, annual tax preparation services, and a dedicated bookkeeping team to help answer any of your questions. With Bench, you can worry less about accounting and taxes to focus your efforts on building your business—or going on vacation. (We won’t judge how you use your newly found free time.)

Bookkeeping and tax filing just work better with Bench.

Put your sales taxes on autopilot

When you sell physical products online, sales tax isn’t optional, but understanding how it works puts you in the best position to file accurate taxes.

Tax season arrives every April, whether you’re ready or not, so it’s a good idea to take the time to prepare your business, get your tax forms in order, and send your taxes in with a smooth and on-time filing experience. That’s a big success for your business and a great addition to your long-term operating strategy.

Helpful resource: Bookkeeping for Amazon Sellers

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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