3 Tax Myths about Tax Preparation for Resellers

Yep, it’s that time of year again – time to file our federal and state tax returns.

W-2’s are out and receipts are in. Banks and other financial entities are sending us their year-end reports, and tax preparers across the U.S. are braced for long hours over the next three months to meet the demands of the tax filing season.

With so many requirements for self-employed individuals, resellers often turn to other resellers, or to social media groups and forums, to seek answers to questions about income tax issues. The problem is, how do you know if you are getting fact-based information? As tax chatter spreads from one person to another, or from one social media group to another, it may mean that misinformation is spreading quickly!

“Sometimes people think, ‘Well, I read this online so much it must be true, and it’s to my benefit so let’s go with it,’” says Mark Tew, CPA and owner of Not Your Dad’s CPA, who specializes in assisting e-commerce sellers.

Tew discusses three of the most prevalent tax myths making the social media circuit:

Tax Myth 1: If you don’t make over $20,000 from reselling, you don’t have to report your reselling income.

For the most part, ALL of your income as a reseller is taxable, Tew emphasizes.

He explains that this misconception evolved from a requirement implemented in 2011 that requires third party payment processors such as PayPal, banks, and credit card merchants to issue Tax Form 1099-K (Payment Card and Third Party Network Transactions) to sellers if they have $20,000 in sales and 200 or more transactions.

So, the $20,000 marks the financial institution’s obligation to report a seller’s activity to the IRS. This figure does not pertain to the seller’s responsibility to report their income.

Tax Myth 2: If you resell as a hobby, you don’t have to pay taxes on your income.

This is another “really big misconception,” according to Tew.

“Any profits you make from your hobbies are generally taxable,” he says. But he added that what often happens is that the income from hobbies ends up as a net loss instead of a profit. “Often sellers are selling personal items for less than they purchased them, which creates a loss. The IRS can’t tax a loss, there has to be a profit.”

Tax Myth 3: You don’t pay taxes on reselling profits if you made less than $400.

Here, Tew makes the distinction between income tax and self-employment tax.

“If you have less than $400 in profits, you still have to pay income tax, but you will not have to pay self-employment tax on that amount,” Tew advises.

Self-employment tax is separate from income tax. In his recently released e-book, Reseller Finance, Tew notes: “Once you start selling with the intent to make a profit, you are considered to be self-employed and thus subject to federal self-employment tax.”

So there you have it – the most common tax myths for resellers debunked. Do you know of another commonly believed tax myth that affects resellers? Share your inside knowledge with us in the comments.

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