Paying Taxes on eBay Income - Do eBay Sellers Need to Report their Earnings?

Should I be paying taxes on my eBay income?  This was a question I was faced with yesterday from my friend / business partner as we celebrated our earnings for December. Our eBay partnership has been a success so far, bringing in over $700 for me last month!

When he asked me whether he needed to be reporting the income that he earned on eBay I turned to a resource by a friend of mine that’s all about managing your taxes on eBay sales, eBay Tax Tips Book. I ran him through the list of nine factors that the IRS looks at to determine if you are trying to make a profit, or if you’re just enjoying a hobby:

1. Whether you run the activity in a business like manner
2. How much time and effort you put into making a profit
3. Whether you depend on the activity for your livelihood
4. Whether your losses were due to conditions beyond your control
5. Whether you changed your operating methods to improve profitability
6. Whether you or your advisors have the knowledge needed to carry on a successful business
7. Whether you successfully made a profit in similar activities in the past
8. Whether the activity makes a profit in some years, and how much
9. Whether you can expect to make a profit in the future from the activity

He answered yes to enough of the questions that we determined he needed to establish a business entity to manage his eBay income and expenses. So yes, he should be reporting his income, in addition to tracking his expenses so he can offset some of the earnings and bring down the total tax bill. 

Of course, in order to deduct those expenses he’ll need to be able to prove he’s running a business.  We went over some things he can do to show that he’s indeed operating a business and not just a hobby:

· Get an employer identification number (EIN)
· Apply for a business name
· Have a separate checking account to be used for business transactions
· Hire an accountant to keep his books
· Create a business plan
· Keep track of the time he spends each week doing business activities
· Consult other business owners or advisors to help make his business profitable

I know he wasn’t happy with my answers since it meant some of the profit our partnership generated for him would have to be paid to Uncle Sam but it’s better that he starts tracking it now rather than wait until tax season and have to play catch up.

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