There are four types of taxes a typical self-employed person running an eBay business might have to pay.
Income taxes. You will have to pay income taxes on the net profit your eBay business earns. The federal government imposes an income tax, as do the governments of most states (with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). Some local governments (both county and city) also get into the act by taxing businesses within their jurisdictions; a few use an income tax, while others use some other method (an inventory, payroll, or business equipment tax, for example).
Self-employment taxes. If you are self-employed, you are responsible for paying your own Social Security and Medicare taxes. Unlike employees, whose employers are legally required to chip in for half of these amounts, you will have to pay the entire bill — currently, a 12.4% Social Security tax and a 2.9% Medicare tax on all of your taxable income from self-employment (although there is an earnings maximum amount subject to Social Security — $102,000 in 2008). However, you are entitled to deduct half of these taxes from your gross income for purposes of calculating your income tax. To report and pay self-employment taxes, you must file IRS Form SE, Self-Employment Tax, along with your annual tax return. Even if you have a salaried job, and Social Security and Medicare are deducted from your paycheck, you still have to pay those taxes on amounts you earn from the eBay business you run in your spare time.
Employment taxes. If you have employees, you will have to pay half of their Social Security and Medicare taxes, as well as unemployment tax and perhaps temporary disability tax (to your state taxing authority). You’ll also have to withhold taxes from your employees’ paychecks and deposit them with the IRS. To report and pay unemployment tax, you file IRS Form 940, Employer’s Annual Federal Unemployment Tax (FUTA) Tax Return. To report all withholdings and pay your share of Social Security and Medicare, you must file IRS Form 941, Employer’s Quarterly Federal Tax Return. The rules for employment taxes can get pretty tricky, and many employers are required to make quarterly filings with the IRS. For more information, check out IRS Publication 15 (Circular E), Employer’s Tax Guide, at the IRS website.
TurboTax does not calculate your employment tax, but you can set up your payroll through Quickbooks. Because of the frequent filings required for employment taxes, you might investigate payroll services before hiring employees. These services, which may be offered through your bank, online, or through payroll companies such as PayChex, take care of paying your employees and filing federal and state employment tax returns. Make sure to comparison shop as to both price and reliability. These options are also discussed in the discussion about payroll in the section, Hiring Help.
Sales taxes. Almost every state imposes a tax on the sales of goods. The basic principle for eBay sales tax is that you are responsible for collecting sales tax from any buyer in the state where your eBay business has a physical presence, such as where you have an office or warehouse. For example, if you operate in California and a California buyer purchases an item from you, you would be responsible for collecting California sales tax. eBay will add a sales tax calculation into your listing so that buyers in your state can calculate their sales tax. State sales tax rules vary considerably. For example, every state exempts certain sales from tax (that is, you don’t have to collect or pay tax on the sale), but the list of what is exempt differs from state to state. Similarly, each state's rules vary about when and how to submit taxes you have collected to the state taxing authority. To find the rules in your state, your best bet is to go straight to your state tax agency for help. The Small Business Administration provides links to all state tax agencies, and Commerce Clearing House (CCH) has a thorough explanation of sales tax obligations at its website. Nolo also offers information about sales tax on the Internet. The rules can be complicated if you use a drop shipper — a business that maintains the inventory and facilitates shipment — or run an eBay consignment shop — a business in which others provide you with inventory to sell on eBay for a fee.