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
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:
- Collecting Sales Tax over the Internet
- Online Business Law – Covers privacy issues, intellectual property, and more.
- Online Advertising – Explains SPAM laws and email unsubscribe obligations.
- How to Start a Successful E-Commerce Business – 6 Tips from Seasoned Pros
- How to Choose, Claim, and Protect Your Business Name – Online and Offline
- Five Legal Issues to Consider when Developing and Marketing a Mobile App
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