How to File Taxes as an Online Seller
Before You Start
Complete your year-end accounting checklist before attempting to file. Your books need to be reconciled through December 31, inventory counted and adjusted, all transactions categorized, and 1099-K forms received and reconciled. Trying to file taxes with incomplete or inaccurate books means your return will be incomplete or inaccurate, leading to amendments, missed deductions, or IRS inquiries.
Gather these documents before starting: your annual Profit and Loss statement from your accounting software, all 1099-K forms from Stripe, PayPal, Shopify Payments, Amazon, and other processors, copies of 1099-NEC forms you issued to contractors, home office measurements and housing cost documentation, vehicle mileage log, records of equipment purchases, loan interest statements, retirement contribution confirmations, and health insurance premium records.
Filing by Business Entity Type
Sole Proprietor and Single-Member LLC: Schedule C
If you operate as a sole proprietor or single-member LLC (which is taxed the same as a sole proprietor by default), you report your business income and expenses on Schedule C, filed as part of your personal Form 1040. Schedule C has five main sections:
Line 1 of Schedule C asks for your gross receipts or sales. This is your total revenue before any deductions, matching or exceeding the sum of your 1099-K forms. If your 1099-K forms total $280,000 and your books show $280,000 in gross revenue, the numbers align. If your books show $275,000 (perhaps because some payments were not processed through a 1099-K-reportable processor), enter $280,000 on line 1 and account for the difference through returns, allowances, or a reconciling note. Your reported gross receipts should never be lower than your 1099-K total because the IRS matches these numbers.
Part III of Schedule C calculates your COGS. Enter your beginning inventory value (from last year's ending inventory), purchases during the year, and ending inventory value. The formula: Beginning Inventory + Purchases - Ending Inventory = COGS. This section also asks for your inventory valuation method (FIFO, LIFO, or other). COGS is subtracted from gross receipts to give gross profit on line 7.
Lines 8 through 27 list common business expense categories: advertising, car expenses, contract labor, depreciation, insurance, interest, legal and professional fees, office expense, rent, repairs, supplies, taxes and licenses, travel, utilities, and wages. Transfer totals from your P&L to the corresponding lines. Line 27 (Other expenses) captures categories not listed, such as payment processing fees, shipping costs, and software subscriptions. Attach a statement listing each "other expense" category and amount.
Gross profit minus total expenses equals your net profit (or loss) on line 31. This number flows to line 8 of your Form 1040 as business income. If you have a net profit, you also owe self-employment tax calculated on Schedule SE.
Self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of your net self-employment income. On $80,000 net profit: $80,000 x 0.9235 = $73,880, then $73,880 x 0.153 = $11,304 in self-employment tax. Half of this amount ($5,652) is deductible as an adjustment to income on your 1040, reducing your income tax. Self-employment tax is in addition to regular income tax and is often the largest tax surprise for new sellers.
S-Corporation: Form 1120-S
S-corporations file Form 1120-S, which is a separate business return due March 15 (or September 15 with extension). The S-corp return reports the company's income, deductions, and credits, then passes them through to shareholders on Schedule K-1. Each shareholder reports the K-1 amounts on their personal 1040.
The key advantage of an S-corp is that the owner pays themselves a reasonable salary (subject to payroll taxes) and distributes remaining profit as a dividend (not subject to self-employment tax). This can save $5,000 to $15,000 or more in self-employment tax annually for profitable businesses. The trade-off is the cost of payroll administration, the separate business tax return (typically $1,000 to $3,000 for a CPA to prepare), and stricter compliance requirements.
S-corp returns are complex enough that most sellers should hire a CPA for preparation. The reasonable salary determination, K-1 preparation, shareholder basis tracking, and payroll tax integration require professional expertise to handle correctly and to withstand IRS scrutiny.
Partnership and Multi-Member LLC: Form 1065
Partnerships and multi-member LLCs file Form 1065, also due March 15. Like the S-corp return, it is an informational return that passes income through to partners on Schedule K-1. Each partner reports their share on their personal 1040. Partnership returns require professional preparation due to the complexity of partner allocations, guaranteed payments, and basis calculations.
State Tax Filing
Most states with income tax require you to file a state return reporting your business income. If you live in a state with income tax, you file in your home state. If you have employees in other states or meet economic nexus thresholds in other states (for income tax, not just sales tax), you may need to file in those states as well.
State income tax rates vary dramatically: California's top rate exceeds 13%, while Florida, Texas, and seven other states have no income tax at all. For an ecommerce seller with $100,000 in net business income, the difference between living in California versus Florida could be $10,000 or more in state income tax annually.
State filing deadlines typically match federal deadlines (April 15 for individuals, March 15 for S-corps and partnerships) but not always. Check your state's specific deadline and extension procedures. Some states automatically grant extensions when you file a federal extension, while others require a separate state extension filing.
Sales Tax Filing vs Income Tax Filing
Sales tax filing is separate from income tax filing and happens on a different schedule. Sales tax returns are filed monthly, quarterly, or annually with each state where you have nexus, reporting the tax collected from customers in that jurisdiction and remitting payment. Income tax returns are filed annually, reporting your business profit and paying income tax on that profit.
Do not confuse the two. Sales tax collected from customers is not your income. It flows through a liability account and is remitted to the state. Your income tax return reports revenue exclusive of collected sales tax. If a customer paid $42 for a product ($40 plus $2 in sales tax), your revenue is $40 and the $2 is a pass-through liability.
Self-Filing vs Hiring a CPA
Self-filing works for: sole proprietors with straightforward operations, a single sales channel, no employees, and comfort with tax software. TurboTax Self-Employed ($120 to $200), H&R Block Self-Employed ($110 to $175), or FreeTaxUSA ($0 federal, $15 state) can handle Schedule C filing with guided questionnaires. If your books are clean and you understand your deductions, self-filing is a reasonable option at this level.
Hire a CPA when: you file as an S-corp or partnership, have multi-state filing obligations, received IRS notices or have audit concerns, are considering entity structure changes, have complex inventory or international transactions, or your net business income exceeds $100,000 and the potential cost of missed deductions or errors exceeds the CPA's fee. A CPA costs $500 to $3,000 for ecommerce tax preparation but often saves more than their fee through better deduction capture and tax planning strategies.
Common Filing Mistakes
Reporting less revenue than your 1099-K totals. The IRS computer system matches your reported income against 1099-K submissions from payment processors. If the sum of your 1099-K forms exceeds your reported revenue, expect an automated notice. Always report gross revenue that equals or exceeds your 1099-K total and account for the difference through documented deductions.
Forgetting self-employment tax. New sellers often calculate their income tax on net profit and are surprised by the additional 15.3% self-employment tax. On $80,000 in net profit, self-employment tax adds approximately $11,300 to your tax bill beyond regular income tax.
Missing the home office deduction. Many sellers work from home but do not claim the home office deduction because they are unsure of the rules or concerned about audit risk. If you have a dedicated space used regularly and exclusively for business, the deduction is legitimate and the audit risk is manageable with proper documentation.
Expensing inventory purchases. Recording inventory purchases as an immediate expense rather than as inventory with COGS treatment inflates your deductions in purchase periods and understates them in selling periods. The IRS requires inventory-based businesses to use an inventory method, not direct expensing.