It is a known fact that for a country to thrive and provide its economy and all its people proper services, infrastructures, public works, and all other national up to local improvements, mandatory contributions must be collected by the government from individuals.
In the United States of America, taxes are sourced from different levels such as federal, state, and local sectors. The government-imposed taxes as a percentage of a monetary exchange such as income you earn as a salary, business income, property, dividends, estates, gifts, or any sales that you received payment for goods and services.
The world of online businesses and marketplaces is no exception to the IRS, which is the government body concerned with tax return processing, taxpayer service, and enforcement. This is why platforms like Poshmark have Posh Remit, which is considered as the first country-wide tax collection and remittance service on a social marketplace that simplifies the sales tax collection and remittance process for its sellers. The calculation, collection, and submission of state and local sales taxes are made by the platform on behalf of Poshmark sellers.
Selling on Poshmark is indeed a good source of income. The Poshmark community has millions of buyers who are constantly looking for something that fits their style. May it be clothes, shoes, handbags, or accessories, you are guaranteed to come across the right shopper for your items. And listing in your closet gives you tons of potential of making sales and raking in profit to your bank account.
As someone who earns through Poshmark, it is your responsibility to include on your yearly tax returns your Poshmark earnings to avoid any problems with the IRS concerning your taxes. In this blog post, we have rounded up what you need to know about Poshmark fees, applicable sales tax, sales reports, deductions, and expenses that you should consider as a Poshmark seller stylist to help you navigate how it works.
Poshmark and State Sale Taxes
As we know, Poshmark's seller's fee is pretty straightforward. For any sales you make under $15, a flat commission fee of $2.95 goes to the platform. For anything above $15, 20% goes to Poshmark, and you get your 80%. This may look high for commissions and fees, but seasoned sellers on Poshmark know that it is a fair percentage considering what Poshmark gives in return. These commissions already cover the following:
- Free pre-paid shipping label.
- Free credit card processing.
- Customer support and Posh Protect buyer protection.
- Sales tax is automatically calculated, collected, and remitted to the state on your behalf.
The laws enacted in 2018 and 2019 initiated the collection and remittance of sales tax from online marketplaces, which applies to several states and the District of Columbia. With this, Poshmark launched its tax remittance service called Posh Remit. Through this service, Poshmark now takes care of automatically calculating, collecting, and paying these taxes for you by submitting them directly to states and localities on your behalf.
However, in August of 2019, for some states like Georgia, Hawaii, Illinois, Missouri, Tennessee, and Utah, Poshmark stopped collecting and remitting sales taxes due to online marketplace laws that are about to take effect in those states. So, Poshmark sellers in these states became temporarily responsible for reporting and verifying applicable taxes to tax authorities on their own. But, in 2020, Poshmark has started collecting and remitting taxes for these states again, including Florida.
State and local sales tax are charged on items like used, boutique, and wholesale items that are bought and shipped to an address within the United States and are calculated based on different factors such as:
- Type of item purchased
- Buyer's delivery address
- Seller's return address
- Shipping costs
Take note that taxes may vary depending on the final sale price. If you wish to see the sales tax that has been collected and remitted for your sales, you may request your My Sales Report.
How to get your sales report in Poshmark
Your Sales Report is an important document that you will need for tax purposes. It lists orders marked as received within your chosen time frame upon request. To request your Poshmark Sales Report, you will have to be logged in on your Poshmark account and do the following:
If you are using the app:
- Go to your Account Tab (@username)
- Select My Seller Tools
- Click on My Sales Report
- Don't forget to select a date range
- Select Email Report
If you are on the web:
- Select your profile picture at the top-right of the page
- Select Order Activity
- From the left-side menu, select My Sales Report
- Don't forget to select a date range
- Select Email Report
You must know the email linked to your Poshmark account so you can receive the email containing a link to download your CVS file. Take note to open the file on a CVS-compatible program, like Microsoft Excel.
Do you need to claim Poshmark earnings on tax returns?
There are considerations on claiming your Poshmark earnings on your tax returns. It will all depend on what you're selling and how much you're making. For example, if you are selling clothes for less than the purchase price, then no, you are not obliged to report it. This usually applies to those who are just selling clutter from their closet for less than the price they purchased it; hence it is not necessary to report it.
As a rule of thumb, the money you make from items you sold less than what they cost you is exempted from tax. However, items you sold higher than their original price when you purchased them are considered taxable as a capital gain that you should declare in the Schedule D IRS form.
But if you are making more than $600 or more in a calendar year, it is your responsibility to pay the taxes you owe from any income earned during the tax year. Given that you are selling on Poshmark, which uses third-party payment platforms, they are required to report payments facilitated through their services. Meaning, the IRS is aware of the amount of money moving into your account. This will reflect in the 1099-K form as it is used to record certain payment transactions. So you must keep track of your income and expenses.
Why do we recommend keeping an inventory sheet?
Keeping an inventory sheet is an essential part of having a business. Not only does it prevent stockouts, but it also ensures accurate records that will benefit you when declaring your taxes. Here are some other reasons why it is important that you keep an inventory sheet:
- It helps keep track of expenses and costs: In every business, it is vital to know all the money spent on operation and maintenance. These are all the expenses or the money flowing out of your Poshmark business. This includes packaging costs (simple paper wrap, fillers, bubble wraps, or fancy boxes), gas needed for travelling to the post office or thrift store, and costs in purchasing items to resell.
- Costs of purchasing inventory: These are the amounts of money you spend for all your for-sale items, including the stocks. Rent: If you are paying for a space that you rent out to store inventory, this also counts as part of your expenses. Capital for items: This covers the material costs, especially if you sell handmade goods, like knitted scarves and other personalized items online.
- It helps keep track of income: For any business, it is essential to track your profit after taking out all your expenses. This will mean all the money flowing into your Poshmark business, regardless if it is a big or small amount.
- Expenses minus income equals profit: can look confusing and hard to figure out. But for online sellers like you, you only need to report the profits. While most transactions are taxable, there might be sales that don't require you to pay taxes at all, such as when you sold an item at a lower price than what you have spent purchasing it. So aside from considering what you have sold and how much you made, needless to say, it all comes down to keeping an inventory sheet.
Sole Proprietor vs. LLC (Limited Liability Company)
Sole Proprietor refers to an unincorporated business owned by a single person who pays personal income tax on profits earned from a company. The owner has complete control over the business, whereby personal and business finances are one and combined. This kind of business is easy to create and maintain as it only requires minimal fees and does not involve any government regulations and federal registration to operate. However, all profits and debts flow to the business owner due to single ownership, which is considered an entity with unlimited liability. It is also challenging for a sole proprietorship to get capital funding, specifically through issuing equity and obtaining bank loans or credits. Most sole proprietors end up transitioning to becoming Limited Liability Company (LLC) when expanding.
Benefits of Being a Sole Proprietor
- It is easy to establish - Having a sole proprietorship business is inexpensive and easy to establish. Because you are a sole owner, you don't have to formally register your business in a federal or state office. You will only have to spend minimally to register your business name to have appropriate licenses and permits.
- Better protection for your name - Your name as the Sole Proprietor is the legal name of your business. However, if you wish to change this, you may opt to register a different name using a trademark via the U.S. Patent and Trademark Office, or you can file a Doing Business As (DBA) with your state or county clerk's office.
- There are no limitations on the number of people you can employ - Hiring multiple staff and personnel to help you grow your business is okay even without formally building your business. You can hire any number of employees without adjusting your business structure.
- You have complete control over the business - Because you are the sole owner, your business is personally tied to you. You can decide for your business without consulting with anyone like members or shareholders. You are the captain of your ship.
- Great stepping stone - Sole proprietorships are a great start for entrepreneurs to use as their stepping stone before venturing to an LLC or corporation.
On the other hand, Limited Liability Companies (LLC) refers to hybrid companies that individuals and corporations can own. In this kind of business, the company's debts and liabilities are not personal liabilities of the owners referred to as members. The structure of LLCs is a partnership arrangement surrounded by regulations that vary from state to state. When forming an LLC, it requires a business name and articles of organizations that are filed and paid with applicable fees directly to the state. Because LLCs are considered separate entities, they cannot use the individual assets of their members to cover and resolve the LLC's debts and obligations.
Benefits of Being an LLC (Forming a company for your business)
- You can deduct costs against your income - LLCs do not pay taxes themselves. Instead, they are treated as pass-through entities wherein the profits and losses are distributed to the members, who declare them on their personal tax level.
- Better protection against being sued - In an LLC, its members are protected from certain types of legal liability. Should the business incur any debts and lawsuits, the owners or members are not personally liable for it, which is often referred to as personal asset protection. Instead, creditors may go after the LLC's bank accounts and other properties.
- Management can be flexible - Structuring and management of an LLC are flexible. It can be member-managed or managed by a manager appointed by its members.
- Can increase your business credibility - Because an LLC is recognized as a formal business structure, it makes you appear as a credible business to your customers and partners.
- Great for building credit history - This gives you opportunities in accessing loans and lines of credit.
When to Consult a Licensed CPA
It is understandable that declaring taxes that include your transactions in Poshmark as a seller can be confusing. If you have any doubts and are unsure of your tax obligations, it is a good idea to hire someone who can handle more intricate details about your tax returns, such as a licensed CPA. They can help explain and prepare your tax documents and suggest strategies that can lessen your tax liabilities. Furthermore, they can also answer any questions about your tax return should there be any questions from the IRS if you get audited.
Your Poshmark Business
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OneShop offers a no-risk, seven-day free trial with a responsive support team ready to answer all your questions and help you with your closet's needs. If you are ready to experience an intelligent software built to help you grow your business, all you have to do is sign up for a free 14-day trial here!