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Selling Online – Is It a Hobby or a Business?

by Caron_Beesley, Community Moderator

  • Created: March 7, 2012, 7:37 am
  • Updated: March 7, 2012, 4:09 pm
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9 comments

Are you doing business on the Internet? Selling on eBay? Promoting or advertising someone else’s products on your website or blog?

Online money-making opportunities are plentiful – from selling your old books via online auction to promoting products and services for online merchants, or becoming an online merchant yourself. But at what point does this mean you are in business yourself and, since you are making money online, what are your tax and regulatory obligations?

Here’s some guidance about ways you can make money online, along with the tax and regulatory obligations tied to each:

When Is Selling on eBay a Business?

Many of us sell items on eBay or dabble in online money-making activities, but at what point does this become a business and how does this affect your taxes?

If you’re selling on eBay, for example, you can claim this activity as a hobby and deductions against it as long as you’re not buying and selling goods with the intention of making a profit.  Read more about determining whether an activity is a business or hobby from the IRS here.

If you make a profit from an eBay sale, you are required to report it to the IRS – income is income, after all. Now, neither eBay nor PayPal reports transactions to the IRS, so it’s up to you to report your profits.

If you are serious about your eBay venture, consider setting up a business to reduce your tax liability and the threat of penalties for failing to report income (you can then claim business deductions).

What about Affiliate Marketing?

Another popular way to make money online is through affiliate marketing. This is an arrangement by which individual website owners receive a sales commission by promoting products and services of other companies. Most affiliate marketers are individuals looking to make some extra money on their blogs, for example, or website owners who want to generate revenue from their site without selling products directly.

In the eyes of the IRS, affiliate marketing is comparable to being a commissioned salesperson; as a result, the money paid to you must be reported on your taxes as income. Make sure your affiliate companies send you an IRS 1099-MISC form showing your earnings for the previous tax year by February 1; then report these earnings as income on 1040 Schedule C.

Starting an Online Store or e-Commerce Site

If you’re starting a business online, you must follow the same basic steps any business owner needs to take. This involves registering for an Employer Identification Number (EIN), registering your business with the appropriate agencies, getting a license or permit, paying sales taxes, and complying with online regulations such as privacy laws, advertising laws, and intellectual property laws.

SBA offers two guides to walk you through the process of starting a business and understanding the specific obligations of online business owners:

Other useful guides include:

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About the Author

Caron_Beesley's Profile Picture
Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley
Tags: Community Blogs, Business Law Advisor

Comments

SafeReviews | Window Shopper | 3/12/2013 - 5:58 pm

Call it a hobby or not, but if you aren't earning an income it doesn't
matter. Unfortunately, for most of us the first year of the "learning curve"
is a painful "hobby". I cannot tell you how many hours I have writing
articles at the various sites (many more hours than the pay will likely ever
justify), managing my own blogs and it seemed like forever until I got my
first sell. Mostly because I had no clue about getting ranked or attracting
(and keeping) readers, nor did I fully grasp the importance of a niche.
Amazon can get by with selling everything, online marketers cannot. In order
to stand out and be noticed you have to find tightly grouped niches (as many
as you like, of course) and work those niches and that market. I have
articles out there about every topic imaginable at all of the top sites.
Until I started drilling in to specific niches and then combining those
resources, I had no traffic or sales. That learning curve is what kills it
for most newcomers. The good thing about writing for article directories like
Hubpages or Squidoo is that they make keeping track of earnings (and
reporting) very simple.
Professional Web Site: Site Admin

projectfirstsale | Window Shopper | 3/8/2013 - 1:58 pm

I definitely started selling online as a hobby, but once I got my first
affiliate sale, I was hooked! I quickly decided to turn this passion into a
business. Frequently, I still experience many hurdles and setbacks as the
internet is always changing, but once you get through the initial growing
pains, it's well worth it.
Affiliate Marketing for Beginners [1] [1] http://projectfirstsales.org/project-first-sale-review-how-3-ordinary-folks-make-money-online-fast/
Professional Web Site: Project First Sale Review

aaster | Window Shopper | 6/2/2012 - 8:40 am

Actually, i won't call it a business. Some people might perform it as their
business but most of people love to involve in it as their personal interest.
Professional Web Site: 1984 xr 250

Flower Your Business Power | Window Shopper | 5/27/2012 - 7:20 pm

Most small businesses have virtually not yet used the internet as a vessel
for growth. Revenues from online sales are consistently going up and could
grow faster if brands are marketed effectively...
As Wallace D. Wattles repeated in "The Science of Getting Rich", it is not
what you do but how you do it!
Angelo Labrou
Professional Web Site: Instant Customer Revolution

hakanunsal | Window Shopper | 5/16/2012 - 5:46 am

This post has been moved to Spam, please refer to the Rules of Conduct.

Whitney.Marchelle | Window Shopper | 4/25/2012 - 7:26 am

I would like to start my online web store. This resource was indeed very
helpful and gives a great insight for new starters and entrepreneurs like me.
Thank you for sharing this information. I am going to work out a checklist of
do's and donts now.
Professional Web Site: Professional

biglehart | Window Shopper | 4/3/2012 - 3:54 pm

This information is very helpful. I know the tax issues mentioned above are
often overlooked, and I'm glad that the IRS appears to be cracking down on
enforcement by making PayPal and other sites report this income. Tax evasion
and noncompliance cost the United States billions of dollars per year
according to separate analyses done by ThinkProgress and the tax justice
network. Nobody likes paying taxes, but especially in these times of high
deficits, it's good that the IRS tries to recoup some of this lost revenue.

Elimark1611 | Window Shopper | 3/22/2012 - 2:17 pm

Affiliate marketing is really hard now that google panda came out. A friend of mine went from making 100k to like 20k just because of panda
Professional Web Site: RI Personal Injury Lawyer

Amith | Window Shopper | 3/21/2012 - 9:09 am

This post has been removed from public view (spam). Please review the community rules of conduct at http://www.sba.gov/community/discussion-boards/rules-conduct-and-disclaimer.

tmoays | Window Shopper | 3/16/2012 - 8:46 am

FYI - The following comes from paypal's site - Starting in 2011, PayPal is required by the IRS to report the sales of goods and services for customers who, in a single year receive: More than $20,000, AND 200 or more payments. The new IRS 6050W changes apply to all payment providers, including PayPal. This includes payments received after January 1, 2011, with the first reports sent to the IRS in early 2012.