Start Up Help for Amazon Sellers

So often we get asked for help by sellers who are just starting out and we find that many sellers have the same questions. This page is meant to provide support for those sellers. Here you’ll find clear answers to the most common questions. Some people love reading all the details. Some people want a quick checklist of what to do. If you want the quick checklist, you’ll see that right below. If you want all the details, keep reading.

Amazon Seller Quick Startup Checklist

• Step 1: Form your LLC - An LLC is almost always the right choice of entity. There are many services that can help you with this, but I trust LegalZoom. Use LegalZoom to form your LLC today. Where should I form my LLC? Almost always form your LLC in the state that you are doing business. Non-residents of the U.S. should use LegalZoom to form an LLC in Wyoming.

• Step 2: Get your EIN - This is step 2. An Employer Identification Number is needed to open a bank account and do many things. You can get an EIN at the IRS website or have the professionals handle it as part of your LegalZoom LLC formation. If you are a non-resident of the U.S., getting an EIN will take longer on your application must be filed on paper.

• Step 3: Open a business bank account - Most banks are difficult to deal with, that’s why I recommend opening your business bank account at Mercury. I’ve partnered with Mercury to offer a smooth account opening process for Amazon sellers whether you a located in the U.S. or abroad. Just make sure to have your LLC formed and your EIN ready.

• Step 4: Register for a seller’s permit - You’ll need to register for a seller’s permit in the state that you operate your business. This allows you to purchase inventory for resale without paying sales tax. Amazon collects and remits tax in all states that require it. You’ll still need to file a $0 sales tax return in the state where you obtained your permit. You’ll need to file as often as your state requires you to.

• Step 5: Setup a bookkeeping system - You need to know exactly how much money you are making. Looking at the balance in your bank account is not a bookkeeping system. Most start ups can’t afford to pay for monthly bookkeeping and think of using QuickBooks on line as a DIY system. QuickBooks Online is a great system, but it’s made for bookkeepers and accountants. I’ve never once seen anyone do it correctly themselves. That’s why I recommend starting out with InventoryLab. All you need to do is enter your unit costs when you ship to FBA or put products in stock for merchant fulfillment. Your P&L will automatically be calculated.

• Step 6: Get general liability insurance - Once you hit $10k in sales in a single month, Amazon requires you to carry general liability insurance. You can get a quote from Simply Business. It’s not very expensive. Usually about $500/year.

• Step 7: File your first tax return - If you made any sales on Amazon, you’ll need to include that on your personal tax return as income. Whether your received a 1099-K or not is irrelevant. All income is taxable. There is no threshold. That being said, many sellers won’t have a taxable profit in their first year or they only have a minimal profit. We can file your tax return even if you don’t use us for bookkeeping. We’ll make sure you take advantage of all the deductions you are entitled to.

• Step 8: Pay your estimated taxes - When you are self-employed, you are required to pay your estimated income taxes. Estimates are based on the prior year amount owed and cover the balance due for the next year. Most sellers don’t pay these taxes in their first year because they don’t know they have to. After filing your first year, if you are expected to owe $1,000 or more in income tax, we’ll set up a schedule to make your quarterly tax payments.

What is the best type of business entity to form for Amazon sellers?

The top consideration for most Amazon sellers when forming a business entity is minimizing income taxes. Most sellers form a single-member LLC. Sometimes it makes sense to elect to be taxed as an S corporation. Whether that makes sense or not depends on 3 things:

1. How much money you make in wages (W-2) outside the business

2. How much money the business will make in a year

3. How much time do you devote to the business in terms of average weekly hours?

Let’s address #1 first. In 2024 if you make $168,600 or more in W-2 wages, there will be very little benefit realized by electing to be taxed as an S corporation. Form a single-member LLC and keep it simple. If you make less than $168,600 or more in W-2 wages like the vast majority of my clients, move on to consideration #2.

Now let’s address #2. How much net profit will the business earn in a year? If $50,000 or less, there will be very little benefit realized by electing to be taxed as an S corporation. Form a single-member LLC and keep it simple. If you plan to earn a net profit of more than $50,000, then you should definitely consider electing to be taxed as an s corporation.

Now let’s address#3. How much time do you devote to the business in terms of average weekly hours? This will weigh heavily on the amount of tax benefit you can receive from electing to be taxed as an S corporation. Generally speaking, the more time you devote to the business, the higher the business net profit must be to realize a benefit.

There is a very fine balance between W-2 income, business net profit, and time devoted to the business to determine your actual tax savings. It’s impossible to generalize here so I will give you a specific example.

Let’s say you run an Amazon seller business that will earn a $100,000 net profit and you work in the business 20 hours per week. We determine that reasonable compensation for you as an officer as an S corporation is $45,000 based on a number of factors that the IRS requires you to consider. Your federal tax savings in this situation are approximately $7,771. If you worked 40 hours per week

with the same net profit and same hourly salary, your federal tax savings in this situation would be $1,412.

By this example you can see how the more time you devote to the business, the higher your net profit must be to make electing to be taxed as an S corporation worthwhile. Keep in mind that this example is extremely simplified and you need to consult with us to determine your actual tax savings.

Where Should I Form My Business Entity?

Many sellers mistakenly believe they should form their business entities in states such as Delaware, Wyoming, or Nevada, often based on misguided advice from online sources or friends. Forming an entity in Delaware is generally only advantageous if you either operate your business there or if you’re planning to seek investment capital. For the average Amazon seller, this usually isn’t a relevant consideration.

In most cases, sellers are better off forming their business entities in their home states. Establishing an entity in Delaware to bypass stringent regulations in states like California or New York is counterproductive, as it typically results in doubling your compliance requirements. These states are aware of such perceived “loopholes” and usually require you to register as a foreign entity in your home state as well.

If you’re thinking of forming an entity in another state to save on income taxes, it’s important to note that all entities, except for C corporations, are passthrough entities. This means that you, as an individual, are responsible for paying income taxes on the entity’s earnings, regardless of where the entity is formed.

One exception is if you don’t live in the States. If you are a non-resident of the U.S., I recommend using LegalZoom to form an LLC in Wyoming.

How do I get an EIN?

Obtaining an Employer Identification Number (EIN) is a straightforward and free process, and is a crucial step for businesses that have chosen to form as an LLC or a corporation. Even for sole proprietors, who can use their Social Security Number for tax purposes, obtaining an EIN can be beneficial for separating personal and business finances.

To obtain an EIN:

1. Visit the IRS website and locate the EIN application page.

2. Complete the online application form, which usually takes a few minutes.

3. Once the application is submitted, you will be issued an EIN immediately.

4. You can choose to have the approved number mailed to you or download a PDF copy of the letter right away.

It’s important to save the letter containing your EIN, as you’ll need it for various purposes, such as opening a business bank account, applying for business licenses, or hiring employees. Additionally, when filing taxes, you’ll use your EIN instead of your personal Social Security Number.

If you are a non-resident of the U.S. you won’t get an immediate response. You’ll need to file for an EIN on paper and it will take a few weeks to receive it.

Should I Open a Business Bank Account?

Opening a business bank account is a crucial step for managing your business finances and separating them from your personal finances. This practice is essential for maintaining accurate financial records, meeting tax obligations, and protecting your personal assets.

Here are the steps to open a business bank account:

1. Choose a Bank: Research banks in your area, or online banks, to find one that offers business accounts with features that suit your needs. Consider factors like fees, transaction limits, online banking features, and customer service. We recommend using Mercury. We’ve partnered with the for ease of account opening for our clients.

2. Gather Required Documents: Before you visit the bank or start an online application, gather the necessary documentation. You will typically need your business formation documents (Articles of Organization for an LLC or Articles of Incorporation for a corporation), an Employer Identification Number (EIN), and possibly an operating agreement for an LLC or bylaws for a corporation. Some banks may require additional documentation, so it’s a good idea to call ahead and ask.

3. Open the Account: Visit the bank in person or start the online application process. Provide the required documentation and complete any forms. Once the account is open, you can make your initial deposit and start using the account for business transactions.

4. Use the Account for Business Only: It’s essential to keep your business and personal finances separate. Use your business account exclusively for business-related expenses and income. Avoid commingling personal and business funds, as this can lead to financial and tax implications.

5. Understand Tax Consequences: If you have a business structure other than a sole proprietorship or single-member LLC, be aware of potential tax consequences when moving money in or out of the business.

Maintaining a separate business bank account is a fundamental practice for any business owner. It simplifies financial management, ensures compliance with tax regulations, and helps protect your personal assets from business liabilities.

If I register for a seller’s permit, do I need to file sales tax returns?

Yes. Once you have a seller’s permit, you’re expected to file sales tax returns. Think of it like signing up for a responsibility. Even if you’re on Amazon, which handles the tax for you, you still need to file. Sometimes, you might not owe any tax (like if all your sales were on Amazon), but you still need to report that by filing a “zero tax” return. The state will tell you how often you need to file, usually based on how much you sell. Always keep track of these dates to avoid any penalties for non-filing or late filing.

What is the best bookkeeping software for Amazon Sellers?

The best bookkeeping software for you depends on your specific situation. Here’s a simplified breakdown:

• Amazon USA Only Sellers - Single Member LLCs or Sole Proprietors only: If you’re just starting and only sell on Amazon USA, consider using InventoryLab (IL). It’s a great tool to track your inventory value and Cost of Goods Sold (COGS). With IL, you can input the unit cost of items as you send shipments to Amazon, and it will automatically calculate total COGS based on what items have sold and their cost. It also brings in your Amazon sales data and fees to calculate your overall gross profit. However, be aware that IL has limitations. It doesn’t capture sales outside of Amazon USA, and it doesn’t automatically pull in data from credit cards or bank accounts. You can enter expenses manually, but manual entries in accounting are prone to error or omission. If you’re only selling on Amazon USA and don’t have many expenses outside of inventory, it’s better than doing nothing. But remember, it’s not a complete bookkeeping solution. For that, you should consider QuickBooks Online (QBO), as discussed below.

• Amazon Multi-Channel Sellers and S-corps, C-corps, and multi-member LLCs: If you sell on multiple Amazon regions, other platforms (Shopify, eBay, Etsy, Walmart), or have a more complex business entity, you need something more robust. My recommendation is QuickBooks Online (QBO) with an A2X integration. QBO is a full-featured bookkeeping solution that tracks all your income, expenses, assets, liabilities, and equity. However, it can’t automatically pull data from Amazon or other platforms. That’s where A2X comes in. It integrates with QBO to bring in sales, fees, and COGS for each selling platform, reducing manual errors. QBO also lets you connect your bank accounts and credit cards for automatic transaction imports, making reconciliation easier. If your business entity is more complex than a Single Member LLC or sole proprietorship, you should use QBO. The IRS has stricter record-keeping requirements for these entities, so a complete set of books is essential.

Do I have to pay federal income tax on my Amazon income?

Yes, you do. Any money you make from Amazon is considered income, and you need to pay taxes on it. After taking out your business expenses from your total sales, what’s left is your net income. This is what you’ll be taxed on. The exact percentage you’ll pay depends on how much you earn and the tax bracket you fall into. In the U.S., the more you make, the higher the tax rate might be. It’s always a good idea to set aside some money for taxes.

What is Self Employment Tax?

Think of self-employment tax as the money you pay for Social Security and Medicare when you work for yourself. When you’re an employee, you and your employer split these costs. But when you’re self-employed, you cover both parts. So, the rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. This is on top of any other taxes you might owe.

Some Amazon sellers, when they earn more, switch to being taxed as an S-corporation to lower this tax. It’s a way to potentially save money, especially if Amazon is your main source of income.

What federal income tax forms do I need to file?

The federal income tax forms you need to file for your Amazon business depend on your business structure. Here’s a breakdown of the tax forms required for different business structures:

1. Sole Proprietorship: If you operate as a sole proprietor, you’ll report your Amazon income and expenses on Schedule C (Profit or Loss from Business) and attach it to your personal income tax return, Form 1040.

2. Single-Member LLC: If you have a single-member LLC, you’ll also report your income and expenses on Schedule C and attach it to your personal income tax return, Form 1040. This is because the IRS treats single- member LLCs as disregarded entities for tax purposes, meaning they are treated like sole proprietorships.

3. Multi-Member LLC: If your LLC has multiple members, you’ll need to file a partnership tax return using Form 1065 (U.S. Return of Partnership Income). Each member will receive a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) showing their share of the partnership’s income and expenses, which they will report on their personal income tax returns.

4. S-Corporation: If you have elected to be treated as an S-corporation, you’ll need to file a corporate tax return using Form 1120S (U.S. Income Tax Return for an S Corporation). Shareholders will receive a Schedule K-1 showing their share of the S-corporation’s income and expenses, which they will report on their personal income tax returns.

5. C-Corporation: If you have a C-corporation, you’ll need to file a corporate tax return using Form 1120 (U.S. Corporation Income Tax Return). The C-corporation will pay tax on its income at the corporate tax rate.

Should I do my income taxes myself?

Modern tax software has made it much easier for individuals to prepare their own tax returns, especially if their financial situation is relatively simple. If you are an Amazon seller operating as a single-member LLC or a sole proprietor, you might be able to do your taxes yourself using tax software and reporting your income and expenses on Schedule C as part of your personal tax return.

However, preparing a Schedule C can still be a complex process, especially if you’re not familiar with bookkeeping or unsure about the numbers you need to report. Tax software may not offer specific guidance for filling out a Schedule C for an Amazon seller.

For more complicated business structures, like filing a Form 1065 (for partnerships), Form 1120S (for S corporations), or Form 1120 (for corporations), it is generally not recommended for non-professionals to attempt to prepare these returns on their own. These forms can be quite complex, and errors can have significant financial consequences.

Additionally, the IRS matches the gross income reported on 1099 forms with the income reported on tax returns. If there’s a discrepancy between the two, you may receive a notice from the IRS, and you should be prepared to explain and reconcile any differences.

While you may be able to do your taxes yourself if you’re a sole proprietor or single-member LLC with good bookkeeping skills, it’s usually a good idea to seek professional help if your tax situation is more complicated or if you’re unsure about any part of the process.

Do I need a CPA?

While CPAs (Certified Public Accountants) are highly qualified professionals to handle tax returns, they’re not the only ones who can assist you. Tax attorneys, enrolled agents (EAs), and other certified preparers can also help you with your taxes. What’s most important is finding a tax professional who has experience and expertise in dealing with Amazon sellers.

When choosing a tax professional, it’s crucial to ask if they have worked with other Amazon sellers and are familiar with the specific financial reports and nuances of an Amazon business. You can also ask what reports they would need from your Seller Central account to test their knowledge. Being experienced in the world of Amazon selling will make a big difference in the quality of their service and the insights they can provide you.