1099-K: How to deduct marketplace sales tax

[genie187]

Hello.  I sell on Amazon and they collect what's called a marketplace sales tax on your behalf.  The only issue is they include this in your gross amount on the 1099-K.  Where can I deduct this auto-collected sales tax?  Some have said just to not report it as gross income, but since it's over $15,000, I'm afraid it could raise a red flag reporting $15,000 less than what's reported to the IRS.  Others have said to just deduct it in expenses on line 23 of the Schedule C, but instructions seem to specifically say not to do that.  I'm not exactly sure why Amazon does this and other sites like eBay and Etsy do not report these auto-collected taxes on the 1099-K.  

[KathrynG3 · Accepted solution]

Yes, you can definitely report the marketplace sales tax Amazon collected as a legitimate business expense.

However, it is a best practice to always report Forms exactly as received. Keep in mind that the IRS gets a copy of forms sent to you and they expect what you report to match.

Therefore, it is essential to start by entering Form 1099-K identical to what was sent to you in the COMMON INCOME section under Other self-employed income, includes 1099-K, cash, and checks.

Then, it is also acceptable and expected to report the expenses associated with the income. Either option is allowable to capture the marketplace sales tax:

• Option 1: 
  • Report the marketplace sales tax under LESS COMMON INCOME using Rebates and refunds, includes any income returned to customers and enter a Description such as Amazon marketplace sales tax collected
• Option 2:
  • ​​​Scroll down to EXPENSES and click in the lower left hand corner, Add expenses for this work
  • Scroll to Other miscellaneous expenses select the toggle, scroll to the bottom of the page and click Continue 
  • Enter a Description for your offsetting amount, such as Amazon marketplace sales tax collected and Continue

[genie187]

Hi, thank you for replying.  Would that 2nd option be the line 27a on the Schedule C and the Part V about other expenses?

[KathrynG3]

Yes, that would be grouped with other expenses that were not specifically listed in lines 8 through 26 on Schedule C.

You're welcome!

@genie187

[Working through it]

Thank you for the solution.   Just for clarification, TurboTax Premier says this under "What to do with your Form 1099-K - We don't need to create a separate entry for your 1099-K in TurboTax.   That's because your 1099-K income should already be included in other income, such as your self-employment or rental income".   

So, I am thinking that Amazon sellers need to make sure that their Schedule C income is at least as high as what the Amazon 1099-K amount is.   Then we can deduct the withheld marketplace taxes as you proposed.   

Any comments welcome!

[KathrynG3]

Yes, that is correct. If the income is being pulled in from accounting software financial statements, such as form QuickBooks Online, then allegedly, the bank feed would have already reported the proceeds from Form 1099-K. However, some owners prefer to enter in the income directly from Form 1099-K. 

Click here for more details: How do I report income from self-employment? 

For tips on how to enter Amazon reseller income and expenses, this TurboTax resource may be useful, as well: Tax Preparation Checklist

[Peter Channel 540]

According to this turbo tax community link. (I'll attach at end)  It says line 23, Taxes and Licensing.  

I personally think they should have a completely separate line item on the Schedule C to make it easy. 
Now I need to amend my taxes for the last two years.  I never added the sales tax as a deduction.

https://ttlc.intuit.com/community/taxes/discussion/where-do-i-deduct-business-sales-tax-collected-an...

[DianeW777]

It depends. Keep in mind that it is a deduction only if you included the sales tax collected as part of your business income.  Technically, sales tax is not income so it's important to know how you reported your income before you amend your return to deduct the expense. In other words, reducing the income by a sales tax that was never included with the business income would be a double unallowed benefit.

Many third party payers today do include the full amount collected when issuing 1099s to persons who use their services for money transfers/collections.

@Peter Channel 540