eCommerce Taxes - What Do You Have to Pay for Online Sales

Can you believe there was a time when you could just throw stuff up on eBay and not think twice about taxes? 

You'd clean out your closet, make a few bucks, and call it a day. 

No forms, no headaches, no Uncle Sam breathing down your neck.

Well, those days are long gone.

Here's the thing - back in 1994, when someone bought the very first thing online, nobody was sitting around boardrooms thinking, "Hey, how's this whole internet shopping thing gonna mess with our tax system?" 

The entire framework was built for brick-and-mortar stores, period.

Fast forward to now, and ecommerce has completely flipped the script on how we buy and sell. 

But here's what didn't change: a tax system that's still trying to catch up. 

You've got 50 states all doing their own thing, over 12,000 tax jurisdictions in the US alone, and rules that can make your head spin faster than a washing machine.

“But I am NOT a Real Business”

And if you're thinking, "This is just my side hustle" or "It’s just a hobby," I've got news for you. The IRS sees it differently.

The moment you start selling stuff with the intent to make money, you're in business territory - specifically, you're what they call a sole proprietorship. 

Even if it feels more like organized chaos than an actual business.

Look, I get it. 

You probably didn't start selling online because you had a burning passion for tax compliance. 

You saw an opportunity, maybe needed some extra cash, or wanted to turn a hobby into something more. 

But here's the reality: understanding this stuff isn't optional anymore.

The good news? It's not nearly as complicated as it seems once you break it down. And that's exactly what we're going to do.

Keep in mind that this article is only offering general advice, not something that's tailored to the individual's circumstances.

What Are Ecommerce Taxes and Why Should You Care?

Ecommerce taxes are basically all the different taxes you need to deal with as an online seller. 

We're talking sales tax, income tax, use tax, and if you're selling internationally, VAT (Value Added Tax). 

It's like a tax buffet, but not the fun kind.

Why does this matter? 

You want to stay legal. Failing to handle your tax obligations properly can lead to penalties, fines, and the kind of government attention you definitely don't want. 

States are getting more aggressive about collecting what they're owed, especially with sales tax.

It keeps your business healthy. Getting blindsided by tax bills you didn't see coming is a fast way to kill your cash flow and your motivation.

The Types of eCommerce Taxes You Need to Know About

Sales Tax

Sales tax is what you collect from your customers when they buy something.

Here's where it gets tricky - you don't collect it everywhere. You only collect it in states where you have what's called "nexus."

Think of nexus as your connection to a state. 

Maybe you have a warehouse there, employees, or you've hit certain revenue or order numbers. 

If you're based in Florida but selling to California customers and you've crossed their threshold, guess what? You're collecting California sales tax now.

Income Tax

Income tax is what you pay on your actual profits - not your sales, your profits. 

That's revenue minus all your expenses. 

You'll deal with federal income tax for sure, and probably state income tax—unless you're in one of those lucky states like Texas that doesn’t have it. 

But watch out: Just like with sales tax, income tax nexus rules apply. 

If you have a physical presence, employees, or enough economic activity (like sales over a certain threshold) in a state, you could owe income tax there, even if your business isn’t based there.

Use Tax

This is the weird cousin nobody talks about. 

Use tax kicks in when sales tax should have been collected but wasn't. 

Say you buy inventory from a supplier who doesn't charge you sales tax, but the item is taxable in your state. You're supposed to pay use tax on that.

Most sellers completely ignore this, but states love to check for it during audits. Keep records of your untaxed purchases - you'll thank yourself later.

Value Added Tax (VAT)

If you're selling internationally, especially to Europe, VAT is your new reality. 

It's applied at each stage of the supply chain, and if you're exporting goods to VAT countries, you need to understand their rules. 

Each country does its own thing, so it can get messy fast.

When Do You Actually Need to Start Worrying About This?

Here's what most people get wrong: they think there's some magic number where taxes suddenly kick in. The truth is more nuanced.

The IRS wants to know about your business income regardless of how much you make. 

According to IRS Publication 334: "You have to file an income tax return for 2024 if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Instructions for Form 1040"

Even if you only made a dollar in profit after all your expenses, technically, that should be on your tax return.

But here's the thing - whether you actually owe taxes depends on your total financial picture. 

Let's say you're single, worked a regular job making $14,000, and your side business made $1 in profit. Your total income is $14,001. 

The standard deduction for 2025 is $15,000, so that wipes out your taxable income completely. You might not even need to file.

The $400 Rule Changes Everything

Here's where it gets real: once your business profit hits $400 or more, you're not just dealing with income tax anymore. You're also on the hook for self-employment tax.

Self-employment tax is basically your version of payroll taxes - Social Security and Medicare. 

It's about 15% of your profit, and here's the kicker: most of the deductions that can wipe out your income tax (like that standard deduction) don't touch self-employment tax.

So even if your only income was $400 from your online business, and the standard deduction zeroes out your income tax, you're still looking at roughly $60 in self-employment tax ($400 × 15%).

What About Losses?

If you spend more than you make (hello, inventory purchases), you end up with a business loss. 

Some people think, "Well, I didn't make money, so I don't need to report anything." Wrong move.

Business losses can actually help you. 

They can offset other income on your tax return, or if you don't have other income, they can be carried forward to offset future profits. It's usually worth reporting your losses.

How to Figure Out Your Tax Obligations

Alright, let's cut through the confusion and talk about how to actually figure out what you owe and where you owe it. 

This is where most people get overwhelmed because it feels like you need a law degree just to understand what applies to you.

Here's the truth: it's not as complicated as it looks once you break it down step by step. 

The key is understanding that your tax obligations aren't some mysterious black box - they follow predictable patterns based on where you sell, how much you sell, and what you're selling.

1. Identify Where You Have Sales Tax Nexus

Nexus is just a fancy word for "connection." 

If you have a significant connection to a state, you might need to collect sales and income tax there. 

The tricky part is that "significant connection" can mean different things.

Physical Nexus - The Old School Way

This one's straightforward. If you have a physical presence in a state, you've got physical nexus there. 

We're talking:

• Warehouses or storage facilities - even if you're renting a small storage unit
• Offices - including your home office if you're running the business from there
• Employees - full-time, part-time, contractors who work in that state
• Retail locations - brick and mortar stores, booth at trade shows, pop-up shops

Here's what catches people off guard: if you're using Amazon FBA and they store your inventory in a warehouse in Ohio, congratulations - you just created nexus in Ohio. 

Doesn't matter if you've never set foot in the state.

Economic Nexus - The New Kid on the Block

This is where things get interesting. 

States figured out that people were selling tons of stuff to their residents without having any physical presence, so they created economic nexus rules.

Economic nexus typically kicks in when you hit certain thresholds in a state. Most states use an "OR" structure, meaning you only need to hit one of the thresholds:

• $100,000 in sales to customers in that state in a year
• 200+ transactions to customers in that state in a year
• Some states use different numbers, but these are the most common

However, some states require you to meet BOTH thresholds. 

Connecticut and New York specifically require that both the sales dollar amount and transaction thresholds be reached before economic nexus kicks in.

Interestingly, there's a trend toward eliminating transaction thresholds altogether - as of January 1, 2025, 14 states have already cut the 200-transaction threshold from their economic nexus laws, which would make this distinction less relevant over time.

Affiliate Nexus and Click-Through Nexus

Some states have these more obscure nexus rules:

• Affiliate nexus - if you pay people in that state to refer customers to you
• Click-through nexus - similar to affiliate, but specifically about online referrals

These don't affect most sellers, but worth knowing they exist.

Marketplace Nexus

Here's a newer wrinkle: some states say that if you sell through a marketplace (like Amazon), and that marketplace has nexus in the state, then you automatically have nexus too. 

The good news is that many of these states also require the marketplace to collect the tax for you.

Step 2: Determine What Types of Taxes Apply to You

Once you know where you have obligations, you need to figure out what kind of obligations they are.

Sales Tax - State by State

Every state with sales tax does it differently. 

Some states tax everything, some have exemptions for groceries, clothing, or other necessities. Some cities and counties add their own taxes on top of state rates.

Here's what you need to know for each state where you have nexus:

• What's taxable - physical goods usually are, digital products sometimes are, services usually aren't (but not always)
• What rate to charge - state rate plus any local rates based on where your customer is located
• How often to file - monthly, quarterly, or annually depending on your sales volume
• When payments are due - usually 20th of the month following the reporting period

Income Tax - Federal and State

Your business profit gets taxed at both federal and (usually) state levels. But unlike sales tax, income tax depends on where your business has nexus, not just where you sell.

Federal Income Tax

• Who pays? Every U.S. business (except tax-exempt entities).
  
  
• How? Pass-through entities (LLCs, S-corps) report profit on your personal return; C-corps file separately.
  
  
• Rate: Progressive brackets (up to 37% for individuals, 21% for C-corps).
  
  

State Income Tax

• Who pays? Depends on two things:
  
  • Your home state (if it has an income tax).
    
  • Other states where you have nexus (physical or economic ties).
    
• Key rules by state type:
  
  • No income tax states: Texas, Florida, Nevada, etc.
    
  • Pass-through friendly states: Some (e.g., NH) tax wages but not business income.
    
  • Full income tax states: Most follow federal rules but add their own rates (e.g., CA: 1–13.3%).

Nexus Triggers (Like Sales Tax, But Different Thresholds)

Even if you’re based in a no-tax state, you might owe income tax elsewhere if you have:

• Physical presence: Office, employees, or inventory in another state.
  
• Economic nexus: Exceeding sales/payroll thresholds (e.g., $500K in CA, $100K in NY).
  
• Filing requirements: Some states require returns if you hit nexus, even if you owe $0.

Self-Employment Tax

Here's where things get really interesting - and where a lot of people get caught off guard. 

That $400 threshold I mentioned earlier? It's not just about income tax. 

Once you hit $400 in business profit, you're also on the hook for self-employment tax, and this is where your business structure can make a huge difference in how much you actually pay.

Self-employment tax is 15.3% of your net business earnings. It breaks down to 12.4% for Social Security and 2.9% for Medicare.

This is essentially your version of payroll taxes - the same taxes that employees and employers split 50/50, except you get to pay both halves.

Your business structure choice can have a major impact on your self-employment tax burden. 

The difference between paying 15.3% on all your profits versus optimizing through an S Corp election can save thousands of dollars annually as your business grows.

However, each structure comes with its own administrative requirements, compliance costs, and restrictions. 

What makes sense for a $30,000 side business might be different from what works for a $150,000 operation.

Bottom line: As your business profits grow, especially beyond $60,000-$80,000 annually, it's worth consulting with a tax professional about whether your current structure is still the most tax-efficient choice for your situation.

Use Tax - The Forgotten One

Use tax applies when you should have paid sales tax on something but didn't. Common scenarios:

• Bought inventory from a supplier who didn't charge sales tax
• Bought business equipment from an out-of-state seller
• Bought supplies online without paying sales tax

Most people ignore use tax until they get audited. Don't be most people.

International Taxes - VAT and Friends

If you're selling internationally, each country has its own rules:

• European Union - VAT rates vary by country, and there are thresholds for when you need to register
• United Kingdom - has its own VAT system separate from the EU now
• Canada - GST/HST depending on the province
• Australia - GST with a threshold of AUD $75,000

The key with international taxes is that ignorance isn't a defense. If you're selling to these countries, you need to understand their rules or work with someone who does.

Step 3: Register for Sales Tax Permits

You can't legally collect sales tax without the proper permits. Here's how this works:

Getting Registered

Each state has its own registration process, usually through their Department of Revenue website. You'll need:

• Basic business information (name, address, type of business)
• Your Social Security number or EIN
• Information about what you're selling
• Sometimes a small registration fee

Timing Matters

Most states want you to register before you start collecting tax, or within 30 days of creating nexus. 

Don't wait until you feel like dealing with it - late registration can lead to penalties.

Once registered, you'll get:

• A sales tax permit or license
• Instructions on how to file returns
• Your filing frequency (monthly, quarterly, annual)
• Login credentials for their online system

Keep Your Information Updated

If you move, change your business structure, or stop selling in a state, you need to update your registration. States don't like surprises.

Step 4: Monitor Sales Thresholds for Economic Nexus

This is the ongoing part that trips people up. 

Economic nexus thresholds aren't something you check once and forget about - you need to monitor them.

Set Up Tracking Systems

Whether it's a spreadsheet, your ecommerce platform's reporting, or dedicated tax software, you need a way to track:

• Sales by state (dollar amounts)
• Number of transactions by state
• Running totals throughout the year

Know the Thresholds for Each State

Different states have different rules for charging sales tax on items shipped out of state:

• Most use $100,000 or 200 transactions
• Some states use different amounts ($500,000 in a few cases)
• Some states only count transactions, not dollar amounts
• Rules can change, so stay updated

Plan Ahead

Don't wait until you hit a threshold to start thinking about registration. 

If you're at $80,000 in sales to a state in October, you should probably start the registration process in November, not wait until you hit $100,000 in December.

Use Alerts and Reminders

Set up alerts in your tracking system to notify you when you're approaching thresholds. Many tax software platforms can do this automatically.

What About Product Taxability?

Not everything you sell is necessarily taxable in every state. This is where things can get really granular:

Generally Taxable

• Most physical products

Sometimes Taxable

• Digital products (varies widely by state)
• Software downloads
• Subscriptions
• Services

Often Exempt

• Groceries (in many states)
• Clothing (in some states)
• Medical devices
• Educational materials

The key is to research each state's rules for your specific products. 

When in doubt, err on the side of collecting the tax - it's easier to refund over-collected tax than to chase down under-collected tax.

If You're Employed and Running a Side Hustle

Most ecommerce sellers actually start this way - you've got your regular job with a steady paycheck, and you're selling stuff online on the side. 

This creates some unique tax situations that are different from being purely self-employed.

How W-2 Income Affects Your Tax Picture

The good news: Your employer is already withholding income taxes and payroll taxes from your regular paycheck. This often covers some or all of your income tax obligation on your side business profits.

The complication: You're still on the hook for self-employment tax on your business profits, and your employer isn't withholding anything for that.

Example: Let's say you make $60,000 at your day job and $15,000 profit from your online business. Your employer has been withholding income taxes assuming you make $60,000, but you actually made $75,000. Plus, you owe self-employment tax on that $15,000 (about $2,120).

The Self-Employment Tax Still Applies

Here's what catches people off guard: you must pay self-employment tax on your business profits regardless of whether you have other employment.

Having a W-2 job doesn't exempt you from this.

However, there's one important interaction: if your W-2 wages already hit the Social Security maximum ($176,100 for 2025), you won't pay the Social Security portion (12.4%) of self-employment tax. You'll still pay the Medicare portion (2.9%) on all your self-employment income.

If you're making $176,100+ at your day job, you're probably not reading this article about side hustles. For most folks, you'll pay the full 15.3% self-employment tax on your business profits.

State Tax Complications

Don't forget about state taxes on your business income. Even if your employer withholding covers your federal obligations, you might still owe additional state income tax on your business profits.

And all those sales tax obligations we talked about? Those still apply regardless of your employment status. Having a day job doesn't change your nexus obligations or filing requirements for sales tax.

Record Keeping Is Even More Important

When you're mixing W-2 income with business income, keeping clean records becomes crucial. You need to clearly separate:

• Business income and expenses
• Personal expenses (not deductible)
• Work-related expenses from your day job (limited deductibility)

The IRS wants to see that your side business is a real business, not just a hobby. Having organized records helps establish this.

When Your Side Hustle Grows

Here's something to plan for: if your side business starts making serious money (say, approaching or exceeding your day job income), the tax strategies change significantly.

At that point, you might want to consider:

• Different business structures (like S Corp election)
• Leaving your day job and focusing on the business full-time
• More sophisticated tax planning strategies

But these are good problems to have and decisions you can make as your business grows.

How Do You File Taxes?

Filing taxes as an ecommerce seller isn't as scary as it sounds once you understand the basic process. 

For most online sellers, you're going to be dealing with Schedule C, which is a two-page form that goes with your regular personal tax return.

The Basic Filing Process

For most online sellers, your taxes will center around Schedule C (Profit or Loss from Business). 

This form goes with your personal Form 1040 and is due on the same April 15th deadline.

You're not filing a separate business tax return - everything flows through your personal return.

You'll use Schedule C if you're:

• A sole proprietor (just you running the business)
• A single-member LLC that hasn't elected corporate tax treatment
• Running the business as your primary or side income

Important Note About LLC Tax Elections

While single-member LLCs use Schedule C by default, they can elect different tax treatment by filing Form 8832 with the IRS. This allows LLCs to be taxed as corporations if beneficial for their situation.

What Goes on Schedule C

Income Section: All your business sales for the year, including any shipping customers paid you. It's just one total - you don't need to break it down by platform or source.

Expenses Section: Every legitimate business expense you can document - advertising, fees, office supplies, software subscriptions, inventory costs. This is where good bookkeeping throughout the year pays off.

Cost of Goods Sold: If you sell physical products, you'll calculate what you actually spent on the inventory you sold (not everything you bought, just what you sold).

The Bottom Line: Sales minus expenses minus cost of goods sold equals your net profit or loss. 

This number flows to two places - your main tax return (for income tax) and Schedule SE (for self-employment tax).

Beyond Schedule C

Depending on your situation, you might also need:

• Schedule SE for self-employment tax (if you made $400+ in profit)
• Form 1040-ES for quarterly estimated tax payments (required if you expect to owe $1,000+ in taxes)
• Form 1120S if you've elected S Corp status
• Various state tax forms for sales tax filing in states where you have nexus

The actual mechanics of filling out Schedule C aren't complicated, but getting your numbers right throughout the year is where most people struggle. 

Without good records of your expenses and sales, tax time becomes a nightmare of trying to reconstruct what happened months ago.

This overview covers the basics, but there's a lot more detail that can help you optimize your tax situation and avoid common mistakes. 

In one of our next posts, we'll dive deep into the step-by-step process of actually completing Schedule C.

Common Mistakes That'll Cost You

Look, everyone makes mistakes when they're starting out. The key is learning what the expensive ones are so you can avoid them. 

These aren't just "oops" moments - they're the kind of errors that can lead to penalties, audits, or paying way more in taxes than you should.

Not Understanding Nexus Laws

This is the big one that catches people completely off guard.

Nexus refers to the connection your business has with a state, which determines whether you're required to collect and remit tax there.

Here's what trips people up: you don't need to live in a state or have a store there to create nexus. 

If you're using Amazon FBA and they store your inventory in a warehouse in Ohio, congratulations - you just created nexus in Ohio. Doesn't matter if you've never been to Ohio in your life.

How to avoid this: Research nexus laws for states where you have inventory stored or high sales volume. Set up tracking for your sales by state so you know when you're approaching thresholds. 

When in doubt, register and collect the tax - it's easier to over-comply than to deal with penalties later.

Terrible Record Keeping

This might not sound exciting, but poor record keeping is probably the most expensive mistake you can make. 

Without organized records, you can't file accurate returns, you miss out on deductions, and if you get audited, you're in serious trouble.

The most common problems:

• Mixing personal and business expenses in the same accounts
• Not tracking business expenses throughout the year
• Losing receipts for major purchases
• Forgetting to document the business purpose of expenses
• Not keeping records of inventory purchases and sales

The real cost: Missing deductions because you can't prove expenses. Overpaying on taxes because you don't have documentation for legitimate business costs. 

Penalties and interest if you get audited and can't support your numbers.

How to avoid this: Get a dedicated business bank account and use it for all business transactions. 

Use bookkeeping software or at minimum a spreadsheet to track everything monthly. 

Take photos of receipts immediately. Note the business purpose of every expense.

Missing Filing Deadlines

States are not forgiving when it comes to late sales tax payments. 

Miss a deadline, and you're looking at penalties and interest charges. Do it repeatedly, and you can seriously damage your business credibility.

What makes this worse: Different states have different filing frequencies. You might file monthly in one state, quarterly in another, and annually in a third. It's easy to lose track.

The penalty reality: Late filing penalties can be 10-25% of the tax owed, plus interest. Even if you don't owe any tax (maybe you had no sales that period), you can still get hit with penalties for not filing the return.

How to avoid this: Set up a calendar with all your filing deadlines. Use reminders or alerts. 

Consider working with a service that handles this for you. File even zero returns if required - don't skip filing just because you didn't owe tax.

Not Tracking Inventory Properly

If you sell physical products, inventory tracking affects both your taxes and your business decisions. 

Get it wrong, and you could be overpaying taxes or making poor business choices based on bad numbers.

Common inventory mistakes:

• Not tracking what you actually sold vs. what you bought
• Mixing up cost of goods sold with total purchases
• Not accounting for inventory on hand at year-end
• Poor tracking of returns, damaged goods, or personal use items

Why this matters: Cost of goods sold directly reduces your taxable income. If you don't calculate it correctly, you might pay tax on income you didn't actually make.

How to avoid this: Use inventory management software or at minimum track purchases and sales carefully. Do physical inventory counts. Understand the difference between what you bought and what you sold.

Assuming Online Platforms Handle Everything

A lot of sellers think that because Amazon or eBay provides some tax documents, all their tax obligations are handled. That's not how it works.

What platforms do: They might collect sales tax in some states on your behalf. They'll provide 1099 forms for your income.

What they don't do: Handle your income taxes. Collect sales tax in every state where you have nexus. Deal with use tax obligations. Handle your business expense tracking.

The reality: You're still responsible for understanding your tax obligations and ensuring compliance. The platforms are tools, not complete solutions.

Not Planning for Tax Payments

This is especially painful for people coming from W-2 jobs who are used to taxes being withheld automatically. When you're self-employed, nobody's withholding taxes for you.

The surprise: Come tax time, you might owe thousands in income tax and self-employment tax. If you haven't been setting money aside, this can create serious cash flow problems.

Quarterly estimates: If you expect to owe $1,000 or more in taxes, you're supposed to make quarterly estimated payments. Miss these, and you could face underpayment penalties even if you pay your full tax bill by April 15th.

How to avoid this: Set aside 25-30% of your business profits for taxes. Make quarterly estimated payments if required. Don't spend tax money on business expenses or personal items.

Don't Forget the QBI Deduction

Most Schedule C businesses with positive net income qualify for the Qualified Business Income Deduction (Section 199A), which can provide up to a 20% deduction on your business income. 

This is calculated on Form 8995 or Form 8995-A and reported on Form 1040.

The Bottom Line

Look, ecommerce taxes aren't going anywhere. 

The system is getting more complex, not simpler. States are getting more aggressive about collection. The IRS is paying more attention to online sellers.

You don't need to become a tax expert, but you do need to understand the basics of what applies to your business.

Stay organized, and don't try to figure everything out at once. 

Get your bookkeeping sorted, understand your nexus obligations, and file your Schedule C properly. Everything else can be layered on as you grow.

When in doubt, ask questions. 

The cost of getting help is almost always less than the cost of fixing mistakes after the fact.

And remember - the goal isn't perfection. 

It's staying compliant, keeping good records, and making informed decisions about your business. 

The wild west days of ecommerce might be over, but that doesn't mean you can't still build something great. You just need to play by the rules while you do it.

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