Amazon FBA taxes are quite different from what you would pay selling on a different platform. The aim of this post is to give you a simple glance into them so you get an overview. This way, you can walk away with a few essential tips to boost your business.
Understanding Amazon FBA Taxes
Sales tax and income tax are the two types of taxes Amazon FBA sellers will deal with.
Income Tax
This is the federal income tax you pay on your business profits. The specific taxes you’ll owe will depend on how you structure your business.
If you run a Sole Proprietorship or a Single-Member LLC, your business income “passes through” to your personal tax return. You’ll report your Amazon income and expenses on Schedule C and pay self-employment tax on your profits. This includes Social Security and Medicare. The government then taxes any remaining profit as individual income.
If you have a Multi-Member LLC, the business income “passes through” to the owners’ personal tax returns, too. In this case, each member will pay self-employment tax on their share of the profits. For corporations, the business files a corporate tax return (Form 1120 or 1120S). Then, owners pay individual income tax on any money distributed to them as dividends.
Sales Tax
You are generally required to collect and remit sales tax on taxable goods you sell to customers. This applies in states where you have a “sales tax nexus.” We distinguish between a physical nexus and an economic nexus.
If you have any inventory stored in a state, you likely have a physical sales tax nexus in that state. Many states have economic nexus laws, too. These laws establish a sales tax collection obligation based on exceeding a certain threshold of sales within the state. This applies for transactions even without physical inventory storage. These thresholds vary by state.
Amazon can simplify sales tax collection and remittance for you if you enroll in their Amazon Sales Tax Service. However, there may be additional fees associated with this service. Regardless of what you choose, the responsibility remains yours. You must stay informed about sales tax laws and nexus requirements in the states you sell to. Don’t rely solely on Amazon to determine your sales tax obligations.
Depending on your location, you might also encounter additional state or local taxes specific to your business activity. Always check the IRS website to stay informed. That site provides a wealth of information on business taxes, including self-employment tax and income tax for various business structures. Each state’s tax authority website will also have information on sales tax laws and nexus requirements specific to that state.
Consider consulting with a tax professional familiar with e-commerce businesses. This will help you to ensure that you comply with all tax regulations and optimize your tax situation.
Form 1099-K
The 1099-K tax form is an information return that third-party payment settlement organizations file. Amazon Payments is one example of this type of organization. The form reports the gross sales processed through your Amazon account. This is the total amount of customer payments you received for your sales on Amazon.
For example, it records the product price itself, any applicable taxes, and shipping fees. (The taxes reflected are those collected by Amazon and remitted to state governments, which is not the case for all online marketplaces.)
Our post on Amazon seller tax documents has more details on the role of the 1099-K form. You can learn about reporting sales to the IRS, the eligibility criteria and how Amazon issues this form. We also cover how you access it and what steps to take if you find discrepancies on it.
Always remember that you are ultimately responsible as the business owner. Maintain good records of all your Amazon sales and business expenses. This record will be crucial for reconciling your 1099-K information and accurately reporting your income on your tax return.
Legal and Business Structures
Choosing the right legal entity for your Amazon business is an important decision that can impact your taxes, liability protection, and overall business structure. Below is a breakdown of the most common options for Amazon sellers, along with their pros and cons, to help you make an informed decision.
Sole Proprietorship
This is the simplest type of business and the easiest to set up. You have no need for complex legal or tax filings. All business profits and losses pass through to your personal tax return. On the flip side, you shoulder unlimited liability. Your personal assets are at risk if someone sues your business or it incurs debt. This may not be ideal for businesses with high risks or significant inventory.
Limited Liability Company (LLC)
An LLC provides liability protection, shielding your personal assets from business liabilities. It’s relatively simple to set up and maintain compared to corporations. Profits and losses pass through to the owner’s personal tax return (single-member LLC). Alternatively, the business can be taxed as a separate entity (multi-member LLC). The negative side of LLCs is that you may face annual fees, depending on your state. This may also not be the ideal business type for raising large amounts of capital through investors.
Corporation (C Corp or S Corp)
Corporations offer the strongest liability protection, separating your personal assets completely from the business. They also hold potential for attracting investment through issuing shares. However, they pose the most complex and expensive legal and tax structure to set up and maintain. Corporations face double taxation, meaning profits are taxed at the corporate level and then again as dividends to shareholders (C Corp) or owners (S Corp).
When choosing the right legal entity for your Amazon business, carefully consider the following key factors:
- Liability Protection: How important is it to shield your personal assets from business liabilities?
- Tax Implications: Do you prefer a pass-through tax structure (income taxed once) or a separate entity structure (potential for double taxation)?
- Growth Potential: Do you plan to grow your business significantly or raise capital from investors?
- Complexity: How comfortable are you with managing legal and tax filings?
Amazon’s Role in Amazon FBA Taxes
Marketplace Facilitator Laws
Many U.S. states have enacted marketplace facilitator laws. They shift the responsibility of collecting and remitting sales tax from individual sellers to the online marketplace platform. These laws impact how marketplaces like Amazon collect and remit sales tax in various US states. You can read about the responsibility shift and how facilitation works in our post on Amazon seller tax.
The most vital aspect to know about these laws is that they are not a blanket solution. They may not eliminate all your sales tax obligations. You might still need to collect sales tax for sales made outside the marketplace. Or, you may need to do it in states where the marketplace hasn’t yet reached the threshold to trigger facilitator responsibility.
Amazon Sales Tax Service
This is an optional service offered by Amazon to help sellers with sales tax collection and remittance. It helps even in states without marketplace facilitator laws. When sellers enroll in the service, Amazon collects sales tax at checkout from the customer based on the customer’s location. For a fee, you can enjoy simplified sales tax compliance and not have to deal with the complexities of it all.
If you prefer to handle these situations yourself, you’ll need to set up sales tax collection in Amazon Seller Central. First, identify the states where you both have sales tax nexus and Amazon doesn’t act as a marketplace facilitator. You can check Amazon Seller Central resources for details on their current facilitator states. Next, register for Seller’s Permits. You can usually register online through the respective state’s Department of Revenue or tax authority website.
You’ll need to enable manual sales tax collection in Seller Central. Log in, navigate to Settings > Tax Settings and click on “Add a State”. Enter the specific state(s) where you want to enable manual sales tax collection and click “Add Selected States”. Type in your permit number for each state. To make it easier, enter the default tax code that Amazon provides. This automatically selects the appropriate tax rate based on the customer’s location.
Alternatively, you can set up custom tax codes for specific product categories or situations. Once you’ve entered all the information, click “Save” to activate manual sales tax collection for the selected states.
Tax Deductions and Credits
Make sure you identify common tax deductions and credits available to FBA retailers to minimize tax liabilities. Cost of Goods Sold (COGS) is the largest deduction for most FBA sellers. It represents the direct cost of the products you sell, including the purchase price, shipping costs to you, and any import duties.
Most Amazon fees associated with selling your products are tax-deductible. This includes fulfillment fees, storage fees, and pick and pack fees. You can also deduct office supplies, packaging materials, shipping supplies, and any other items you use specifically for your business.
If you dedicate a portion of your home for your Amazon business, you may be able to deduct that. For example, office space. Specific rules and limitations apply, so consult with a tax professional for guidance. You can also deduct subscriptions to software programs used for managing your business. This includes inventory management software, accounting software, and marketing tools.
Costs associated with promoting your products on Amazon or other platforms can generally be deducted. Think about pay-per-click advertising and product photography, for example. You can also deduct travel expenses for attending industry trade shows or meeting with suppliers. Just make sure they meet IRS guidelines for business travel.
Ask a tax professional about deducting interest paid on business loans used to finance your Amazon business operations, too. Some states offer specific tax credits for e-commerce businesses. Research any potential credits available in your state.
Tools and Resources for Amazon FBA Tax Management
As an Amazon FBA seller, managing sales tax across different states can be a complex and time-consuming task. Here’s where tax automation software comes in. These tools can streamline your sales tax reporting and filing, saving you valuable time and minimizing the risk of errors.
Tax automation software is designed to simplify the sales tax process for e-commerce businesses. These software solutions offer features like:
- Automatic Sales Tax Calculation – Integrates with your Amazon seller account and automatically calculates the appropriate sales tax rate for each transaction based on the customer’s shipping address.
- Sales Tax Reporting – Generates sales tax reports by state, summarizing your taxable sales and tax collected.
- Filing Integration – Some software can connect with state tax authorities to electronically file your sales tax returns (availability varies by state and software).
Popular Tax Automation Software for FBA Sellers
TaxJar is a popular option known for its user-friendly interface and affordable pricing plans. It offers real-time sales tax calculations, automated reports, and integrations with various e-commerce platforms like Amazon Seller Central.
Avalara is a comprehensive tax compliance solution that offers a wider range of features. For example, it helps with sales tax automation, product taxability classification, and international tax compliance tools. This tool is suitable for larger businesses with more complex tax needs.
Taxify (by Sovos) is another comprehensive solution with features similar to Avalara. It helps with sales tax automation, product taxability tools, and international tax capabilities.
Frequently Asked Questions
What steps should I take if I haven’t received my 1099-K form from Amazon?
If you didn’t get a 1099-K and you think you should have, contact Seller Support. Remember that you may not have met the qualifications. Make sure you check for the form in Seller Central first. It will be in the Tax Document library under the Reports menu.
How can I decide between an LLC and an S Corporation for my Amazon business?
An LLC is a popular choice for many Amazon sellers. It balances liability protection, simplicity, and pass-through taxation. This option is ideal for most small to medium-sized businesses. However, a corporation can be more suitable for large businesses with significant growth potential. This can also be more attractive for businesses that need to raise capital from investors.
What Is EcomBalance?
EcomBalance is a monthly bookkeeping service specialized for eCommerce companies selling on Amazon, Shopify, Ebay, Etsy, WooCommerce, & other eCommerce channels.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
- Monthly Finance Meeting Agenda
- 9 Steps to Master Your Ecommerce Bookkeeping Checklist
- The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
- What Is a Profit and Loss Statement?
- How to Read & Interpret a Cash Flow Statement
- How to Read a Balance Sheet & Truly Understand It
Conclusion
By understanding these different types of taxes and staying informed about relevant regulations, you can effectively manage your tax obligations as an Amazon FBA seller. Check out our Amazon seller tax post for additional tips on filing and reporting taxes for your Amazon business. We also recommend that you research different strategies for collecting, filing, and reporting sales and income taxes as an Amazon seller. Don’t forget to set up separate tax settings for products and use Amazon’s reports to help you. Tracking and reporting taxes accurately is vital!
