Selling online looks simple until the tax side shows up: sales tax rules that differ state by state, an inventory system that decides when you can deduct what you spent, self-employment tax stacked on income tax, and a 1099-K regime that changed three times in four years. The good news is that 2025 and 2026 actually brought relief — the 1099-K threshold snapped back to $20,000, and states keep dropping their transaction-count nexus tests. Here's the whole map for 2026, in plain English.
What taxes does an online seller actually owe?
Three separate systems, and mixing them up is the root of most seller confusion:
| Tax | What triggers it | Who handles it |
|---|---|---|
| Sales tax | "Nexus" in a state — physical presence or crossing an economic threshold (typically $100,000 of sales) | The marketplace collects on marketplace orders; you collect on your own website |
| Federal income tax | Profit: sales minus cost of goods sold minus expenses | You — Schedule C with your 1040 (or your entity's return) |
| Self-employment tax | The same profit — 15.3% (12.4% Social Security on the first $184,500 in 2026, plus 2.9% Medicare) | You, through quarterly estimated payments |
| State income tax | Profit, generally in your home state | You, with your state return |
One habit that prevents headaches: sales tax you collect is never your income and never your expense — it's the state's money passing through your account. Book it as a liability, not revenue.
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What happened to the 1099-K — and what does $20,000 really mean?
The whiplash is over. The American Rescue Plan had dropped the 1099-K reporting threshold to $600, which would have buried casual sellers in forms. Congress reversed that in July 2025: the threshold is back to more than $20,000 in gross payments AND more than 200 transactions through a third-party settlement platform (PayPal, Etsy Payments, eBay, Amazon payouts), retroactively — and, under current law, it isn't indexed for inflation.
Three pieces of fine print still matter:
- Direct card processing has no threshold. If you run your own merchant account through a processor, those settlements are reportable from dollar one — different plumbing, same matching computer.
- Some states kept lower reporting thresholds, so a state-level form can still arrive even when no federal one does.
- Taxability never depended on the form. Every dollar of profit was taxable at $600 and is still taxable at $20,000. The threshold changes what the IRS sees automatically — not what you owe.
Also remember that a 1099-K reports gross — before refunds, fees, and shipping. Keep your books at gross sales with fees and refunds as their own expense lines, so your return reconciles to the form instead of triggering a mismatch letter.
Where do you owe sales tax?
Nexus — the connection that lets a state make you collect — comes in two flavors:
- Physical: an office, an employee, a warehouse — including inventory sitting in an Amazon FBA fulfillment center, which can create nexus in states you've never set foot in.
- Economic: crossing a sales threshold, most commonly $100,000. The old "200 transactions" alternative is dying: by January 1, 2026, sixteen-plus states had eliminated it (Illinois that same day; Kentucky follows in August 2026). That's real relief for sellers with lots of small orders.
Then the collection question: every state with a statewide sales tax now has marketplace facilitator laws, so Amazon, Etsy, eBay, and Walmart collect and remit on marketplace orders for you. Your own Shopify or WooCommerce store gets no such help — once you have nexus, those sales are entirely yours to collect. And a few states still expect a registration or information filing even where the marketplace collects, so "the platform handles it" is 90% true, not 100%.
The state-by-state mechanics — thresholds, registration, filing frequency — live in our sales tax nexus guide.
How does inventory change your deductions?
The rule that surprises every first-year seller: buying inventory is not a deduction. You deduct cost of goods sold — the cost of what actually sold — in the year it sold.
Rough shape: you spend $40,000 on product this year, and at cost, $28,000 of it goes out the door. Your deduction is about $28,000; the other $12,000 sits on your books as an asset until it sells. (Your exact number depends on your counting method — this is the shape, not your figure.)
That also means import duties, tariffs, and inbound freight aren't standalone write-offs — they're capitalized into what the inventory cost you and flow out through COGS. If you import and paid tariffs through 2025's rate turbulence, read our guide to tariff refunds — some importers are owed money back.
Sellers averaging under $32 million in gross receipts (the 2026 threshold — you're almost certainly under it) can use simplified small-business inventory methods. "Simplified" still requires a year-end count and consistent tracking.
Which deductions do online sellers miss most?
The recurring gaps we find in seller books: platform and payment-processing fees (large, and invisible if you only book net deposits), shipping and packaging supplies, the software stack (listing tools, repricers, bookkeeping apps), product photography and samples, advertising, mileage to the post office and suppliers, and home office — with a quirk worth knowing: the exclusive-use rule has a carve-out for inventory storage, so the section of garage holding your stock can qualify even though it's a garage.
If your bookkeeping starts from "whatever hit the bank account," you're understating both revenue and expenses — and usually overpaying tax. Cleaning that up is a one-time project with a permanent payoff. Problems come here to get solved.
How do you stay ahead of the tax bill?
No employer withholds for you, so the IRS expects quarterly estimates (April 15, June 15, September 15, January 15). The working rule of thumb: set aside 25–30% of each month's profit.
Ballpark: $60,000 of net profit means self-employment tax somewhere near $8,500, plus federal income tax at your bracket, plus state. The safe harbor keeps penalties off the table — pay in 100% of last year's total tax (110% if prior-year AGI topped $150,000) and settle the difference at filing. And before year-end, scan the rest of this year's rule changes in our 2026 tax changes hub.
FAQ
I didn't get a 1099-K this year. Do I still report the income?
Yes. The restored threshold changes the paperwork you receive, not what's taxable. Platform reports and bank deposits document your income with or without a form.
I'm just clearing out my closet on eBay. Is that taxable?
Selling personal items for less than you paid produces no taxable gain — and no deductible loss. Occasional sellers rarely owe anything. The rules in this guide are for selling with profit intent; if amounts are meaningful, keep evidence of what items originally cost.
Amazon collects sales tax for me. Am I done?
On marketplace orders, mostly yes. But FBA inventory can still create obligations, a few states want registrations regardless, and your own-website sales are 100% yours to handle.
Can I write off inventory that won't sell?
Generally yes — once it's genuinely written down, donated, or disposed of, with documentation. A year-end cull is good operations and good tax hygiene at the same time.
When should an online seller consider an S-corp?
Once profit is consistently strong (very roughly $80,000–100,000+), the payroll-tax math can start to favor an election. It adds real admin, so run the numbers before you leap — that's a 15-minute conversation.
Reviewed by the WAYG tax team · Updated July 2026
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