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The following article was written for GoTo Auctions (formerly known as AuctionRover). The rights have reverted to the author.
The latest issue of Time Magazine (Feb. 21, 2000) indicates that about 20,000 people "derive their income from auctioning items at eBay." (p.27) Presumably, they mean that that many people get all of their income that way. Many more substantially supplement their wages with auction sales. The opportunities are simply too good to pass up.
But when you earn income, you are required to pay taxes on that income. And if you got into auction selling as a hobby and are now making significant money, chances are that you have not been keeping the complete and clear records that they will need when filing tax returns.
Keep track of all your expenses and all the money that comes in, and be consistent about how you record information. The IRS is well aware that people are making serious money through online auctions, and every sale of yours is permanently recorded by the auction sites like eBay, as part of their mechanism for collecting fees. So even though you aren't a dealer and are just selling old junk, it would be wise to report all your auction earnings on your income tax return (using Form C). And be sure to record and document every related expense, otherwise, to the IRS, it will look like all the money that came in was taxable profit.
Start by retrieving a complete list of your sales from the auction sites that you use, and gleaning whatever information you can from the records you kept just to keep track of who bought what and where and when you shipped it.
Gather all the auction-related expense receipts that you can find -- including credit card bills that list such purchases. And begin to save such receipts on a regular basis. I put them all in a box, then once a month record them in an accounting book. The Dome Simplified Monthly Bookkeeping Record works well for that. You can find it for sale in most office supplies stores.
Religiously save postage receipts. If you pay by check or credit card that will give you a back up way of tracking that kind of expense, but keep the receipts as well.
You might benefit from using home accounting software, like Quicken. If you enter all your income and checks and credit card expenses, religiously, you will be able to generate very useful reports at the end of the year, and that will make the ordeal of tax time far more tolerable.
Also, keep a notebook in your car in which you record all auction-related mileage. That includes every trip to the post office or to the office supply store. Note the date, the starting odometer reading, the ending number and how many miles that means. Also record the reading on your odometer on Jan. 1 and Dec. 31 each year. Currently, the IRS allows 31 cents per mile. Over the course of a year, a daily trip to the post office can add up to a significant expense.
If you pay some auction-related expenses by credit card -- e.g., the fees at eBay or buying office supplies at a nearby store, if possible put all those payments on the same credit card, and only use that particular card for your business. That will make it a lot easier for you to keep track of expenses.
If you are a serious auction seller, you should concentrate your activities, if at all possible, in one room of your house or apartment, so you can qualify for home office expenses. If you have an eight room house and use one of those rooms exclusively for your business, you can count as a business expense one-eighth of all the utilities.
If you are that serious, I strongly recommend that you buy and use tax software, such as Turbotax. That will help step you through the complex steps and help make sure that you have included everything that you can and should. You can also then submit your taxes electronically over the Internet.
Keep in mind, that in addition to federal income tax, you may owe state and local income taxes. And you probably also owe self-employment (social security) tax, which is recorded on your 1040, but which is a separate additional tax. If you have a regular job and a high income, you may already have paid the maximum for the year. If not, your income on your own little auction selling business will be considered as self-employment income, on which you have to pay a social security tax of 12.4% and a Medicare tax of 2.9% -- in addition to income tax. That's why it is very important to record and document every expense. The more expenses, the less the income and hence the less the tax. If your auction income is a significant part of your income, you may also be required to file quarterly estimated taxes with the IRS and possibly with your state as well. That's another reason why it is very helpful to use tax software -- the tax regulations have simply become too complex for the ordinary individual to understand without help.
But above all focus on keeping good records. Without such records, regardless of how good your tax software or your tax accountant/advisor may be, you are likely to end up paying far more in taxes than you need to. And if you rely on your memory or enter what seem to be reasonable estimates, you could be in a very bad position if audited because you will not be able to provide proof, and may wind up paying serious penalties.
Basically, if auction-selling has become a business for you and you are making serious money, treat it like a serious business. Get organized, and keep careful records.
Other auction articles by Richard Seltzer
Can we help you build an Internet business? Richard Seltzer is an independent Internet writer/speaker/consultant. Click here for details. or send email to seltzer@samizdat.com
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