If I am a dropshipper, how do my taxes work?

[blbarker66]

I am a newbie with taxes. I want to start a dropshipping business but need to know how the taxes would work.

[Opus 17 · Accepted solution]

Payments you receive are gross income.  The goods you arrange to be shipped are an expense.  Your shipping cost is another expense, as are credit card transaction fees.  If you have a business-only computer, cell phone, printer or landline, you can probably deduct it as an expense as well.  (Although, if you stop using the equipment for business, you may have to repay some of that deductions.)

You owe self-employment tax (15%) on your net profit from business.  This is the self-employed person's version of social security and medicare tax.  Your net profit also flows onto your personal tax return where it is combined with any other income from other jobs, and the effects of your deductions and credits is taken into effect.

Because you don't have withholding, you probably need to make estimated payments to the IRS 4 times per year so as not to owe penalties for late or underpayment of your taxes.

You may want to look at the Quickbooks self-employment bundle which includes a single-business version of Quickbooks for your business records and a single-business version of Turbotax for your tax returns.

[blbarker66]

Thanks Opus 17!

[VolvoGirl]

Some general info......  You will need to keep good records.  You may get a 1099Misc at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small.  You might want to use Quicken or QuickBooks to keep tract of your income and expenses.  There is one called QBSE QuickBooks Self Employed that works with Turbo Tax and will give you a free online tax return next year.
 <a rel="nofollow" target="_blank" href="http://quickbooks.intuit.com/self-employed">http://quickbooks.intuit.com/self-employed</a>

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 57.  The SE tax is in addition to your regular income tax on the net profit.

Here is some IRS reading material……

IRS information on Self Employment
<a rel="nofollow" target="_blank" href="http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center"...

Publication 334, Tax Guide for Small Business
<a rel="nofollow" target="_blank" href="http://www.irs.gov/pub/irs-pdf/p334.pdf">http://www.irs.gov/pub/irs-pdf/p334.pdf</a>  

Publication 535 Business Expenses
<a rel="nofollow" target="_blank" href="http://www.irs.gov/pub/irs-pdf/p535.pdf">http://www.irs.gov/pub/irs-pdf/p535.pdf</a>


PAYING QUARTERLY ESTIMATES
The first year you don't need to pay estimates as long as you pay in (by withholding) as much as your tax was last year.  But if you will have a big income you should send in estimates so you don't owe too much next April on your tax return.

For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
 
- 2. You expect your withholding and credits to be less than the smaller of:
    90% of the tax to be shown on your current year’s tax return, or
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months).

[testingbotlolimcvool]

Now, when it comes to paying taxes as a dropshipper (self-employed), at the end of the year, do you pay taxes 15 % for self-employed AND income tax depending on the tax bracket you fall upon? 

[VolvoGirl]

Yes.  I probably mentioned that above.  

You pay 15.3% SE tax on 92.35% of your Net Profit on Schedule C greater than $400.  The SE tax is in addition to your regular income tax on all your income which includes the net profit.

[meresela]

Thank you!  Been trying to figure out expenses as a first-time taxpayer for this business model and this helps a lot!