Selling on Amazon sounds really enticing and like a great opportunity. One responsibility aspiring sellers don’t think about right away is Amazon FBA taxes and the heavy task of filing and paying them.
Are taxes an intimidating topic for you? In this blog post, we will give you a rundown of how taxation works for Amazon FBA Sellers, how you need to accomplish them, how you can save money on your taxes, as well as bookkeeping tips.
Disclaimer: Sourcing Monster is not a tax professional and should not be relied on as one. This article is for educational and informational purposes only. We strongly recommend that you consult your own tax, legal, and accounting advisors.
What Taxes do Amazon FBA Sellers Need to Know About?
Sales Taxes for Sellers
Amazon FBA sellers collect sales taxes from their customers for each state they sell in. Sales tax on Amazon is an amount of money, calculated as a percentage, that is added to the cost of a product or service when purchased by a buyer on the platform.
These sales taxes are not nationwide policies, they exist at state and local levels. Each state and local jurisdiction has the power to set their own tax laws and rates. The only states that do not demand sales taxes are New Hampshire, Oregon, Montana, Alaska, and Delaware.
Later on in this article, we will discuss how you can determine if your business is liable for sales taxes based on several factors in each state and jurisdiction.
Sales tax is not the only thing an Amazon FBA seller needs to know about. The income tax matters as well!
How you earn money (taxable or non-taxable), how much money you earned, and when that happened are all vital pieces of information for filing your taxes. This is paid to the IRS yearly.
The IRS has a progressive tax system, which means that people who earn more money will pay higher taxes. As your taxable income rises, you move into one of the seven federal tax brackets. It ranged from 10%, 12%, 22%, 24%, 32%, 35% and 37% for the 2021 tax year. The rates for these seven brackets vary by year and depend on your filing status (single or married).
If you fail to file taxes with the IRS, there are some serious consequences. You may owe back taxes on your profits or on your personal income, and this could lead to both civil and criminal penalties (fines). Monthly penalties usually start at 5%, and the IRS will inform you of how much you owe.
The IRS can also demand that people experience jailtime if they do not pay their taxes, however it is rare for this to occur — particularly if your tax bill has not reached hundreds of thousands of dollars or more.
Every year, you are responsible for determining the bracket you fall into, and we recommend that you consult a CPA for this very important task.
A Deeper Look at Amazon Sales Taxes
Amazon charges a fee of 2.9% per transaction in order to collect sales tax. In the past, FBA sellers were on their own in figuring out different tax codes and laws for each state.
Recently, a new Marketplace Facilitator legislation law has shifted the sales tax collection and remittance obligations from a third-party seller to the marketplace facilitator. In this case, Amazon is the Marketplace Facilitator.
Therefore, Amazon has started taking care of calculating, collecting, and remitting sales tax on our behalf. They even refund it when necessary.
Sales Tax Nexus
An FBA seller is required to collect sales tax if they have nexus in that state/province. Again, only New Hampshire, Oregon, Montana, Alaska, and Delaware do not demand sales taxes.
There are two types of Nexus:
- Physical – You have employees or other personnel, inventory, office, warehouse, store, dropshipping, affiliates, and/or equipment located in that state
- Economic – You have more than $100,000 in unadjusted gross sales in the past year. Or you exceed a state-mandated dollar amount of sales in a particular state, or you have earned over a certain state-mandated number of transactions in a particular state.
As an FBA seller, if you store your product inventory in other states, some of the states may consider you as having sales tax nexus with them even if you don’t have other forms of Physical nexus with them. Check here to learn more about each state’s legislation.
In some states, certain product categories are not taxed at all or are taxed at a different rate from others. Groceries, clothing, and textbooks are a few examples. In Minnesota, for example, clothing and grocery items are both non-taxable. While in Tennessee, grocery items are taxable, but only at a reduced rate of 5%.
How to Comply with Sales Tax
- Register for a sales tax permit in that state and register for each state’s tax system individually
- Charge sales taxes to customers in each state, which includes overall state tax rate, as well as county or district taxes
- File state tax returns in each state.
Each state assigns you a filing frequency after registering. These frequencies vary, ranging from once a month, once a quarter, or once a year.
Note: Some states also collect shipping tax. You can read all about it here.
Amazon’s Seller Central Help page has an article for each state’s legislation that you can read here.
When and How to File Sales Tax
Thankfully, Amazon has made it easier for sellers by taking the responsibility for calculating, collecting, remitting, and refunding state sales tax on sales sold by third party sellers for transactions destined to states where Marketplace Facilitator and/or Marketplace collection legislation is enacted.
Tax season is generally between January 1st and April 15 yearly. Amazon now takes care of reporting sellers’ earnings to the IRS on their behalf.
One way that Amazon assists their sellers is by automatically providing a Form 1099-K if you:
- Sell more than $20,000 in unadjusted gross sales on Amazon, and
- Sell more than 200 transactions within the calendar year (from January through December)
This form is basically your annual report card for taxation purposes. If you do not meet both of the above mentioned thresholds, you will not receive this form.
Amazon has an article describing the following as well:
Note: Certain states have a lower reporting threshold compared to the federal levels. Please consult with the IRS (Internal Revenue Service) or your tax professional adviser to understand if your state qualifies.
IRS regulations require non-U.S. taxpayers to provide Form W-8BEN to Amazon in order to be exempt from U.S. tax reporting requirements.
Read more about it on Amazon’s Seller Central Help page here to learn when you will receive the form, where to find it, how to fill it out, as well as other Frequently Asked Questions.
How to View Sales Tax Collection on Seller Central
This is already set up on your Amazon Seller Account by default, but we recommend that you verify it by checking it manually on Seller Central:
- Log in to Seller Central
- Hover over the Settings wheel icon on the top right corner, then click Tax Settings from the dropdown menu
- Choose the option: “View/Edit your Tax Collection and Shipping & Handling and Giftwrap Tax Obligations Settings”
You can select here which states you want to collect sales tax in, as well as if you want to collect it at the county and other local levels. You can click on the “Add States” dropdown to make it easier to view.
You will notice that Delaware, Missouri, Montana, New Hampshire, and Oregon are not selected by default in this dropdown. Four of these states don’t collect sales taxes with the exception of Missouri. You will only have to add Missouri to the list if you have nexus or live in that state.
There is also an option to enter a custom sales tax rate, however, this is not recommended because sales tax rates are subject to change frequently.
Be informed that you’ll need your state sale tax registration number handy before Amazon allows you to set up sales tax collection. This is a measure to protect sellers from accidentally and illegally collecting sales tax without having obtained proper registration with a state.
Even though Amazon is very helpful in this area, we still highly recommend that you consult a CPA to ensure that you are handling this correctly, especially when choosing a Default Product Tax Code. They will be able to inform you of any tax exemptions as well as any future changes in tax legislation.
Assigning the Proper Tax Codes to Your Products
To view or edit Default Product Tax Code:
- Log in to Seller Central and hover over the Settings wheel, then click on Tax Settings.
- While viewing Tax Calculation Rules, use the dropdown menu next to Default Product Tax Code, then select your Default Product Tax Code
- See the View Product Tax Codes link next to the dropdown menu to view the complete list of Product Tax Codes and the associated rules for each
- Read the Tax Methodology, Service Terms and check acknowledgment box, then click Save Settings
Item level: Your item level Product Tax Code (PTC) is assigned in the Items Inventory page. This is used to assign a specific PTC to its corresponding specific item, and the item level PTC is used before an assigned default PTC. It is possible to use a custom rate, but it is not recommended because sales tax rates are subject to change frequently. Your PTC rule and rate will be overridden with your custom rate. Custom rate is not available in Amazon Canada.
To view or edit item level product tax code:
- On Seller Central, access Manage Inventory then click Edit for the chosen product
- On the Edit Product Info page in Offer tab, locate the Tax Code field
- Choose the field then select your item level product tax code from the drop down list, then click Save and Finish
How You Can Save on Your Taxes
Hire the right accountant – An accountant may be an expense to worry about, but if they know what they are doing, they will ultimately be able to save you money from paying even higher in taxes. They will also be able to take care of calculating your deductibles.
Be registered as an LLC – This has an impact on Amazon seller tax. An LLC, or limited liability company, is a type of legal business structure that provides its owners with limited personal liability. This means that the owners are only responsible for debts up to the value of their investment. This is in contrast to corporations which protect shareholder assets up to their total contributions.
An LLC in the United States may be the most tax-efficient method for non-US sellers to do business. All profits from a single-member LLC go straight to the owner, who must then disclose the income in his or her country of residence.
Contribute to your retirement – To boost your tax refund, open your own 401(k) and contribute as much as you can into your account. In 2021, you can funnel up to $19,500 into it. If you’re 50 or older, in 2021, you can contribute an extra $6,500. Read all about a Solo 401(k) here.
All About Claiming Deductions
Any expense that is considered “ordinary, useful, and fair” that helps a company to generate income is a tax-deductible cost. It’s generally deducted from business revenue before taxes are calculated.
You can reduce the amount of taxes you may have to pay by subtracting those costs from your adjusted gross income, ultimately saving you money.
Here is a list of what’s acceptable as writing off as deductibles for your business:
- Cost of goods sold (e.g. wholesale price, cost of manufacturing, etc.)
- Shipping costs, which includes fees and supplies
- Costs for a home office (including electronics, furniture, supplies, etc.)
- Amazon FBA Inventory fees as well as other Amazon fees
- Education related to online business and e-commerce
- Software for taxes and inventory
- Online advertising
- Employee salary and benefits
- Consultant fees (e.g. accountant, lawyer, web designer, copywriter, etc.)
Lastly, make sure you take care of proper bookkeeping. Failure to track this can lead to you spending thousands of dollars more than necessary.
How to Manage Bookkeeping
New sellers tend to do their own bookkeeping by keeping a spreadsheet or using Quickbooks, the most popular option, which is only manageable if sales are not coming in at a fast rate yet. Quickbooks
As a business grows, sellers will need to start thinking about making this process easier for them. Because manually bookkeeping a growing business takes too much time away from more important things.
If you want to consider an automated tool that integrates with Quickbooks, here are some options:
- A2X – A very popular option in e-commerce accounting in particular, used by sellers on most e-commerce platforms. A2X pricing packages vary, ranging from $19 to $199 monthly for Amazon sellers. It integrates your orders so that you won’t have to input them manually.
- Bookkeep.com – A service that automatically posts its users’ daily sales summary financials to accounting platforms and reconciles the payment deposits. Bookkeep pricing packages range from $19.99 to $199 per month for an annual plan. Otherwise, month-to-month plans range from $28.50 to $284.50.
- Taxomate – A service that automatically posts summarized transactions from your Amazon Seller Marketplace to Quickbooks Online. It tracks costs of goods sold as well as inventory valuation. There is a wide range of Taxomate pricing packages starting from $12 per month for syncing 500 monthly orders, and their largest package is $833 per month for syncing of up to 100,000 monthly orders.
Not only does it help you as a seller to use tools for bookkeeping, but it also helps your accountant stay organized and do accurate work.
If you want to completely remove bookkeeping from things to worry about, a service that does all of it for you is Bench Accounting. Aside from its software to automate bookkeeping, they also provide a personal bookkeeper so you won’t have to find one yourself.
The benefit to Bench is that they send their clients a year-end report on profit and losses and income statement. You can then forward that along with your 1099-K Form to your CPA to analyze from there.
We personally use and highly recommend Taxomate the most, it is more affordable than A2X but gets the job done just as well!
Taxes sound like a daunting task, but luckily new laws have been put in place that has required Amazon to help sellers with it. It’s important to consult your own CPA who can help you stay up-to-date with any changes in taxation laws, as well as inform you of tax exemptions and requirements.
We hope that this blog post has been helpful for sellers or aspiring sellers who aren’t sure where to start!
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