Selling items online has become a popular way for teens to earn extra money. Whether it’s through platforms like eBay, Depop, or Etsy, young entrepreneurs are finding creative ways to generate income. However, many are unaware of the tax implications that come with online selling. This blog post will break down the essential tax information young online sellers and their parents need to know.
Key Takeaways
- Income from online selling is generally taxable, even for minors.
- Understanding tax obligations is crucial to avoid penalties.
- XOA TAX can help young sellers navigate the complexities of tax filing.
Understanding Tax Obligations
It’s a common misconception that only adults need to worry about taxes. If your teen is making money by selling items online, they may need to file a tax return, even if they are under 18. The IRS considers income from online sales as self-employment income, and it’s generally taxable once it exceeds $400.
If your child used your Social Security Number to set up their online shop, their income will be reported under your SSN. This means their earnings could potentially affect your tax return. It’s important to consult with a tax professional to understand the specific implications for your family’s situation.
Income Thresholds and Form 1099
For federal taxes, anyone earning over $400 from self-employment activities, including online selling, is typically required to file a tax return. This is regardless of any other income they might have.
Online platforms like eBay and Depop are required to issue Form 1099-K to sellers who have over 200 transactions and $5,000 in gross sales during the calendar year. While these are the thresholds for receiving a 1099-K, it’s important to remember that even if your teen doesn’t receive one, their income might still be taxable.
Estimated Taxes
If your teen expects to owe $1,000 or more in taxes, they may need to make estimated tax payments throughout the year. This helps avoid a large tax bill at the end of the year and potential penalties for underpayment. Estimated taxes are typically paid quarterly.
Recordkeeping
What records should my teen keep?
- Income: Keep records of all sales, including invoices, receipts, and payment platform statements.
- Expenses: Keep receipts and records for all business expenses, such as shipping costs, supplies, and advertising.
- Inventory: If your teen sells physical products, it’s important to keep track of inventory purchases and sales.
Deductible Expenses
What expenses are deductible?
- Home office expenses: If your teen uses a dedicated space in your home for their online business, they may be able to deduct a portion of your rent or mortgage interest, utilities, and other home-related expenses.
- Shipping costs: The cost of shipping products to customers is deductible.
- Supplies: The cost of supplies used in the business, such as packaging materials and office supplies, are also deductible.
- Advertising and marketing: Expenses related to advertising and marketing the online business are deductible.
Filing Late and Avoiding Penalties
It’s understandable if tax filing slipped your teen’s mind. If they haven’t filed taxes on their online income, it’s important to catch up as soon as possible. The IRS offers a first-time penalty abatement program that may waive penalties for those who have never filed late before. However, keep in mind that interest charges usually still apply.
State Tax Considerations
In addition to federal taxes, your teen may also need to file state taxes. Many states have their own filing requirements and income thresholds. For example, for the 2023 tax year, Arkansas requires anyone with net earnings of $2,500 or more to file a state income tax return. It’s best to check your state’s specific guidelines to ensure compliance.
Personal Sales vs. Business Income
It’s important to distinguish between selling personal items and running a business. If your teen is occasionally selling used clothes or toys, this might be considered personal sales. However, if they are regularly buying and selling items with the intent to make a profit, it’s more likely to be classified as business income. This distinction can significantly impact tax reporting requirements.
The IRS has specific guidelines to help determine if your teen’s activity is a hobby or a business. Factors they consider include:
- Whether the activity is carried out in a businesslike manner. Does your teen maintain records, have a separate bank account for the business, and advertise their products or services?
- The time and effort put into the activity. Is your teen dedicating significant time and effort to the online selling activity?
- Whether the taxpayer depends on income from the activity.
If the IRS determines the activity is a hobby, deductions for expenses can only be taken up to the amount of income earned from the hobby.
Digital Payment Platforms
If your teen uses digital payment platforms like PayPal, Venmo, or Cash App, it’s important to be aware of their reporting requirements. These platforms are generally required to issue Form 1099-K to sellers who meet certain thresholds.
Tax Planning Timeline
Monthly:
- Track income and expenses.
- Set aside money for taxes.
Quarterly:
- Make estimated tax payments if required.
- Review and organize records.
Yearly:
- File tax return by April 15th.
- Review tax strategies for the upcoming year.
Resources and Tools
IRS Website: The IRS website (IRS.gov) offers a wealth of information, including instructions for Form 1040, Schedule C, and Publication 334 (Tax Guide for Small Business).
Free Tax Filing Software: Several reputable free or low-cost tax filing tools are available online.
Tax Counseling for the Elderly (TCE): This program offers free tax help to all taxpayers, particularly those who are 60 years of age and older. They also specialize in questions about pensions and retirement-related issues unique to seniors.
Volunteer Income Tax Assistance (VITA): This program offers free tax help to people who need assistance in preparing their own tax returns. Generally, this includes people who make $60,000 or less, persons with disabilities, and limited English-speaking taxpayers.
FAQs
What if my teen is under 18? Do they still need to file taxes?
Yes, age doesn’t exempt someone from paying taxes. If your teen’s self-employment income exceeds $400, they are generally required to file a tax return.
My teen didn’t receive a 1099-K. Does this mean they don’t have to report their income?
Not necessarily. Even if your teen didn’t meet the threshold for receiving a 1099-K, their online income may still be taxable.
What are the penalties for filing late?
The penalties for filing late can vary, but they generally include a failure-to-file penalty and a failure-to-pay penalty. The IRS may waive penalties for first-time offenders under certain circumstances.
Connecting with XOA TAX
Navigating taxes can be confusing, especially for young entrepreneurs. At XOA TAX, we understand the unique needs of online sellers. Our experienced CPAs can provide personalized guidance and ensure your teen meets all their tax obligations. Contact us today for a consultation.
Website: https://www.xoatax.com/
Phone: +1 (714) 594-6986
Email: [email protected]
Contact Page: https://www.xoatax.com/contact-us/
Disclaimer: This post is for informational purposes only and does not provide legal, tax, or financial advice. Laws, regulations, and tax rates can change often and vary significantly by state and locality. This communication is not intended to be a solicitation, and XOA TAX does not provide legal advice. Please consult a professional advisor for advice specific to your situation.
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