What Types Of Taxes Do Amazon Sellers Have To Pay?

This post provides a basic overview of the types of taxes that Amazon sellers pay. I wanted to cover this topic because there seems to be a good deal of confusion of over the different types of taxes and what you should concern yourself with as a seller. The types of taxes can be broken down on two broad levels - state and federal taxes.

Federal Taxes

Federal taxes are all basically taxes on income, but they can be broken down into 3 different categories

• Income tax

• Self-employment tax

• Payroll tax

Federal Income Tax - This is the tax you owe on all the income from all sources - business income, employment income, rental income, investment income, etc. It's all aggregated and a series of deductions and credits is applied to arrive at what you will owe according to a tax table and your tax rate will be higher the more you make. There is really no avoiding it and you are always responsible for this tax. All you can do is minimize it to the maximum extent possible.

Self-employment Tax - This tax is a surprise to many sellers who start making money for the first time. If you've ever gotten a paycheck, you'll notice that money is deducted and paid directly to the government on your behalf by your employer. When there is no paycheck involved, you are responsible for remitting this tax yourself. It amounts to 15.3% of your net self employment income. It's added to your total income tax and the only way you can lower it, is to lower your net self-employment income. You are required to pay amounts estimating what you will owe for this tax on a quarterly basis. Most sellers who are unaware of this tax are very surprised when they owe several thousand dollars at tax time.

Payroll Tax - This tax applies if you have employees on payroll. When you have employees on payroll, you are responsible for paying half of the employment taxes. Remember that 15.3% self-employment tax? Well you have to pay half (7.65%) of that for them and the other half comes out of their paycheck. This is a deductible expense for the business and it will lower net income. Sometimes businesses pay employees as contractors to try to avoid paying this tax, but that can get you in trouble with the IRS, so make sure you are following the IRS guidelines on contractor vs employee.

State Taxes

Next are state taxes which can be broken down into 3 categories:

• State income tax

• State payroll tax

• State sales tax

State Income Tax - This tax is very much the same as federal income tax - it's a tax on income from all sources. Again you want to try to minimize it. If you are lucky enough, you might live in a state that collects no state income tax and then you can completely avoid this tax which can be very significant. If you live in a state like NY or CA, you'll pay a high state income tax.

State payroll tax - This tax is paid only if you have employees. You pay your share of the employment tax for your employee.

State sales tax - This tax is one that has changed much in the past years. Amazon has generally gone the direction of collecting it on behalf of the seller in many states and I think we will see this trend continue. Read my post about sales tax for Amazon Sellers to learn more.