Do eBay Sellers Need to Pay Self Employment Taxes?

January 7, 2008

After informing my eBay Partner that he needed to pay taxes on eBay his sales he called me up yesterday and asked if he owes self employment taxes in addition to income taxes on his eBay profits.

My response was, if you are selling on eBay and have a net earnings of more than $400 in a year, you may be subject to the self employment tax of 15.3%. Needless to say he wasn’t exactly happy to hear that his profits in his new business could take another hit, this time over 15%!  He wanted to know what that 15% was for and why he had to pay it.

Self Employment Tax Explained
I explained that the self employment tax rate is made up of two parts: 12.4% for Social Security and 2.9% for Medicare, for a total of 15.3%. To answer why he might be subject to self employment tax, I answered that generally if you have income earned in any of the following ways Uncle Sam expects self employment tax:

* as an independent contractor
* as a sole proprietor of a business
* as a member of a partnership
* from any business you run yourself

Part Time Employment
“But I only sell in my spare time, it’s not my full time job or anything”, my friend protested. I was sorry to tell him that a business does not have to be full time to be subject to self employment tax, income earned from a part-time business in addition to a full time job may also be subject to self employment taxes.

He does work in a full-time job as a software developer and is paid a salary by his employer but the profit from his eBay sales is considered self employment income and is subject to the self employment tax if he has net
earnings of at least $400.

Paying Self Employment Tax
Obviously none of this was making my friend very happy but he knows you can’t fight taxes.  “So how do I pay what I owe”, he asked. I explained that Schedule C of Form 1040 is used to report his business income and expenses and to calculate his net profit or loss. Schedule SE is then used to calculate his self employment tax and to report the amount owed. The numbers from both Schedule C and Schedule SE are then transferred to his Form 1040.

Reducing Your Taxes
As he moaned and groaned about paying another 15.3% of taxes I suggested that next year he record & document all his business expenses carefully to help offset his self employment income. The lower his self employment income the smaller the amount that’s subject to the self employment tax. Keeping good records of what he spends can really pay off!

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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Comments

9 Responses to Do eBay Sellers Need to Pay Self Employment Taxes?

  • Nikki

    So how much money do you need to make in order to start paying taxes on it?

  • ParatrooperJJ

    As a point of information, working as a merc does not violate the Logan Act. Only recruiting for soldiers to fight under a foriegn flag does.

  • Brandon

    Bloggers do need to play self-employment taxes as well.

    By and by, the reason that the partner is being hit harshly is that, as I understand it, he is just facillitating the sale rather than having any stake in the original cost of the item.

  • Tom

    Bloggers who receive income from ad revenue also need to pay self employment tax then, right?

  • Ben

    Good point GeckoGirl, thanks for bringing it up. The key there is to save your receipts so that you can prove how much you paid for it. A lot of people sell things for a loss on eBay just to get rid of them and free up some extra cash. That money isn’t a profit so it’s not taxable.

    Andy, it’s possible to make thousands of dollars a year selling on eBay if you know what you’re doing. You are right, if you’re setup as a business you can deduct business usage of things like your internet access but you have to be careful to follow the rules of the tax code in terms of documentation and proper deductions. I’ll write more about that next week. If you’re looking for an ultimate guide to eBay taxes I’d recommend the eBay Tax Tips book.

  • Andy

    Out of interest, if Uncle Sam is taking your ebay use then can you count the cost of your pc, internet access, office chair and desk as business expenses – I’m sure that would take the profit down under $400 unless you are making TONS of money from ebay.

  • GeckoGirl

    eBay sellers should note that only their PROFIT is considered income. If I bought a coat for $100 several years ago ago and then sell it on eBay for $50, that is NOT considered income because I didn’t sell it for more than my basis in the item. However, if I buy the same coat almost new at a thrift store for $20 and resell it on eBay for $50, the $30 profit is considered income.

  • Jeremy

    You can deduct half of your SE tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax, but at least you can recover a little bit of that SE tax in the form of a income deduction.

    But I see this kind of shock from people who go into business for the first time a lot. It can be a bit frustrating if you aren’t prepared for all of the tax you’ll likely need to pay, so like you said, keep good records so you can maximize deductions.

  • Minimum Wage

    Q: Do soldiers of fortune need to pay self-deployment taxes?

    A: Yes, however, Americans employed in this line of work are violating the Logan Act, therefore none of their expenses are deductible.

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