Amazon Seller Taxes: 1099-K, Inventory & Deductions Guide

How Amazon seller taxes work

Every dollar you earn selling products online is subject to income tax, whether you run a full-time storefront or sell items part-time on the side. According to the IRS Gig Economy Tax Center, you must report all income from online sales on your tax return even if you do not receive an information return like Form 1099-K, and even if you are paid in cash, property, goods, or digital assets.

If you operate with a profit motive and make ongoing efforts to grow your store, the IRS classifies your activity as a trade or business. Under IRS Publication 334 (2025), once your net earnings from self-employment reach $400 or more, you must file Form 1040 with Schedule C and Schedule SE. Net earnings are what remain after you subtract eligible business expenses and your cost of goods sold from your gross sales.

Selling personal items you previously used, like old furniture or clothing, follows different rules than running a business. If you sell a personal item for less than you originally paid, you have no tax liability and can zero out the payment on Schedule 1 (Form 1040) or report it on Form 8949 and Schedule D. If you sell a personal item at a profit, that gain is taxable and must be reported on both Form 8949 and Schedule D.

Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month. The flat price covers everything tax for the year (every federal and state or provincial business return: Schedule C, 1065, 1120-S, 1120 and state returns, plus T2 and T1 with T2125 in Canada), and the owner's personal return when the business income needs it.

• IRS: What to do with Form 1099-K
• CRA: Peer-to-Peer

Understanding Form 1099-K and reconciling gross sales

Online marketplaces are classified by the IRS as third party settlement organizations (TPSOs). In IRS Fact Sheet 2025-08, released October 23, 2025, the IRS confirmed that the One, Big, Beautiful Bill Act (P.L. 119-21) retroactively reinstated the historical federal reporting threshold: a marketplace is only required to file Form 1099-K when your total gross payments exceed $20,000 and you have more than 200 transactions during the calendar year. Marketplaces must send your copy of Form 1099-K by January 31.

You may still receive a Form 1099-K below those numbers. A marketplace can send the form voluntarily, your state may enforce a lower threshold, or the platform must file Form 1099-K and Form 945 if it performed backup withholding under IRC 3406(a). Also, if you accept direct payment cards outside a marketplace through a card processor, there is no threshold, so even $0.01 triggers a 1099-K.

Box 1a on Form 1099-K never matches your bank deposits or taxable profit. According to the IRS Form 1099-K FAQs, Box 1a reports your total gross dollar amount of reportable payment transactions. It does not subtract platform fees, credits, refunds, shipping, cash equivalents, discounts, or the original purchase price (basis) of the items sold. IRS Publication 334 also notes that Form 1099-K may include state and local sales tax collected from the buyer, which is not income to you.

Check the Payee Taxpayer Identification Number (TIN) on your Form 1099-K before filing. If the form shows your personal name and Social Security number, but you report business income on Form 1120, Form 1120-S, or Form 1065, contact the issuer listed under 'Filer' on the top left corner to request a corrected Form 1099-K with your business EIN. Never wait for a correction to file your return. Report the payments on the return you normally file and keep copies of your correspondence.

• Step 1: Compare Box 1a on your Form 1099-K against your annual marketplace merchant statements to confirm the gross transaction total matches.
• Step 2: Subtract non-income items included in the gross total, such as state and local sales tax collected from buyers.
• Step 3: Total your marketplace adjustments from your merchant statements, including referral and fulfillment fees, customer refunds, credits, shipping charges, and discounts.
• Step 4: Report the gross receipts on Schedule C (or your corporate return) and deduct returns, allowances, platform fees, and shipping costs on their designated expense lines.

• IRS: Form 1099-K FAQs: General information
• IRS: What to do with Form 1099-K

Worked example: Reconciling a 1099-K to Schedule C

Here is a worked example created by our team using the official rules and rates in IRS Publication 334 (2025). The seller and store numbers are invented to show the math clearly.

Suppose a sole proprietor sells kitchen goods on an online marketplace throughout 2025. In January 2026, the seller receives a Form 1099-K showing $120,000 in Box 1a across 3,500 transactions, even though only $76,000 was deposited into the seller's bank account.

Using merchant statements, the seller breaks down the $44,000 gap between Box 1a ($120,000) and bank payouts ($76,000): $8,000 was state sales tax collected from buyers and remitted by the platform, $6,000 was customer refunds, $22,000 went to marketplace fees and shipping, and $8,000 was deducted for platform advertising.

For Cost of Goods Sold (COGS) on Part III of Schedule C, the seller started the year with $10,000 in beginning inventory (Line 35), spent $35,000 on wholesale inventory purchases and freight-in (Lines 36 and 39), and counted $15,000 in ending inventory on December 31 (Line 41). Adding beginning inventory and purchases gives $45,000 (Line 40), and subtracting the $15,000 ending inventory yields a COGS of $30,000 (Line 42).

Finally, the seller subtracts $6,000 in outside operating expenses (software, insurance, and 2,000 business miles driven in 2025 at the IRS standard mileage rate of 70 cents per mile, which equals $1,400). By our calculation from IRS Publication 334 rules, subtracting the $8,000 excluded sales tax, $6,000 returns, $30,000 COGS, $22,000 fees and shipping, $8,000 advertising, and $6,000 operating costs from the $120,000 gross 1099-K amount leaves a Schedule C net profit of $40,000.

• IRS: Form 1099-K FAQs: General information
• IRS: Publication 334 (2025), Tax Guide for Small Business

Inventory accounting and Cost of Goods Sold (COGS)

When you buy or manufacture goods to sell on Amazon, you cannot deduct the cash spent on inventory the day you pay your supplier. Under IRS Publication 334, businesses that produce, purchase, or sell merchandise generally must keep an inventory, use the accrual method of accounting for purchases and sales, and value inventory at the beginning and end of each tax year on Schedule C, Lines 35 through 42.

The IRS provides an exception for small business taxpayers whose average annual gross receipts for the 3 prior tax years are $31 million or less and who are not a tax shelter. Qualifying small business taxpayers are exempt from uniform capitalization rules and can choose not to keep a formal inventory by using one of two simplified methods: treating inventory as non-incidental materials and supplies (deducting the cost in the year the items are provided to customers), or conforming to the financial accounting treatment used in their regular books and records.

Under both formal accrual inventory and the non-incidental materials and supplies method, unsold units sitting in a fulfillment warehouse on December 31 are not an immediate write-off at purchase. To switch how you account for inventory or move between cash and accrual later, you must file Form 3115, Application for Change in Accounting Method, under IRS automatic change procedures (Revenue Procedure 2025-23).

• Line 35 (Beginning Inventory): Must match your prior year's closing inventory. If you donate inventory to charity, remove its cost basis from opening inventory so it is not double-counted in COGS.
• Line 36 (Purchases): Net cost of merchandise bought for resale, minus the cost of items withdrawn for personal use and purchase returns.
• Line 37 & 38 (Labor, Materials, and Supplies): Direct and indirect labor for manufacturers, plus packaging or supplies that physically become part of the product.
• Line 39 (Other Costs): Freight-in, shipping from suppliers to warehouses, and containers.
• Line 41 & 42 (Ending Inventory and COGS): Value of unsold stock at year-end (Line 41) subtracted from total available inventory (Line 40) to get COGS (Line 42).

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Form 1099-K FAQs: General information

Tax deductions and 2025, 2026 changes for Amazon sellers

Beyond COGS and marketplace fees, you can deduct ordinary and necessary expenses paid or incurred to run your store. IRS Publication 334 and the IRS Guide to Business Expense Resources detail the deductions for Schedule C filers, including updates for 2025 and 2026 under P.L. 119-21.

For business vehicle trips to drop off shipments, buy supplies, or visit warehouses, you can deduct actual expenses or the IRS standard mileage rate: 70 cents per mile for 2025 and 72.5 cents per mile for 2026, plus business parking fees and tolls. For equipment, computers, warehouse shelving, or software depreciated on Form 4562, the maximum Section 179 deduction limit increased in 2025 to $2.5 million (phasing out above $4 million), and 100% bonus depreciation is allowed for qualified property acquired and placed in service after January 19, 2025.

Three major deductions apply outside Schedule C: you can deduct one-half of your self-employment tax on Line 15 of Schedule 1 (Form 1040), claim the self-employed health insurance deduction using Form 7206, and claim the 20% Qualified Business Income (QBI) deduction on Form 1040 (Line 13a) via Form 8995 or 8995-A, which P.L. 119-21 section 70105 made permanent.

• Home office deduction: Available to homeowners and renters who use part of a home regularly and exclusively as a principal place of business or to store inventory, using the actual expense or simplified method (IRS Publication 587).
• Domestic research and experimental costs: Beginning in 2025, deductible as current business expenses in the year incurred, or amortized over 60 months or more.
• Legal and professional fees: Accounting, bookkeeping, and business tax preparation fees are deductible on Schedule C.
• Contractor payments (Form 1099-NEC): Payments to freelancers for services are deductible. You must file Form 1099-NEC by January 31 for any US non-employee paid $600 or more in 2025. Under section 6041(a), for reportable payments made after 2025, that threshold rises to $2,000.
• Business meals: Deductible business meals remain limited to 50% of the cost.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• CRA: Peer-to-Peer

Self-employment tax and quarterly estimated tax deadlines

Because no employer withholds taxes from your Amazon payouts, federal taxes operate on a pay-as-you-go system. The self-employment tax rate on net earnings is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.

The 12.4% Social Security portion applies up to an annual cap on combined wages, tips, and net self-employment earnings of $176,100 for 2025 and $184,500 for 2026. By our calculation from IRS Publication 334, the maximum 12.4% Social Security tax is $21,836.40 for 2025 and $22,878.00 for 2026. There is no cap on the 2.9% Medicare tax, and a 0.9% Additional Medicare Tax (Form 8959) applies to net self-employment earnings above $200,000 for single filers, $250,000 for married filing jointly, or $125,000 for married filing separately.

If you expect to owe $1,000 or more in federal income and self-employment taxes when filing, you must make quarterly estimated payments using Form 1040-ES via IRS Direct Pay, your IRS Online Account, or EFTPS. If you also work a W-2 job, you can avoid separate quarterly payments by submitting a new Form W-4 to your employer to withhold extra tax from your paycheck.

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Form 1099-K FAQs: General information

Canadian Amazon sellers and cross-border GST/HST rules

If you sell on Amazon from Canada or store FBA inventory in Canadian fulfillment warehouses, you must follow Canada Revenue Agency (CRA) platform economy rules. Canadian self-employed sellers report gross sales and deduct expenses on Form T2125 (filing a separate T2125 for each distinct business) and carry net income to Line 26000 of the T1 return. Canadian corporations file a T2 return with Schedule 125 and Schedule 88 (Internet Business Activities), listing up to their top five income-generating websites or marketplaces.

Under the Excise Tax Act, once your taxable supplies exceed $30,000 over four consecutive calendar quarters, you must register for, collect, and remit GST/HST to the CRA, and can claim input tax credits (ITCs) to recover GST/HST paid on business expenses.

Under Canada's digital-economy GST/HST measures effective July 1, 2021, non-resident vendors and distribution platform operators supplying qualifying tangible personal property delivered or made available in Canada, including goods stored in a Canadian fulfillment warehouse, are subject to the normal GST/HST registration, reporting, and remittance regime. Under Part XX of Canada's Income Tax Act (Royal Assent June 22, 2023), digital platform operators must also annually verify and report seller identity and sales data to the CRA.

• CRA eligible expenses: Platform selling fees, online store marketing costs, raw materials, software licenses (depreciable software with a useful life over one year goes into Capital Cost Allowance Class 12, or Class 8/10 for system software), and editing or translation services.
• Foreign tax credit: Canadian residents who paid foreign income tax on cross-border sales may claim the federal foreign tax credit (a separate calculation is required for each country if total foreign tax paid exceeds $200).

• CRA: Peer-to-Peer
• CRA: GST/HST for digital-economy businesses: Overview

Bookkeeping setup and recordkeeping checklist for sellers

Under IRS recordkeeping rules, you carry the legal burden of proof to substantiate every income entry, COGS adjustment, and deduction on your return. When you file your first Schedule C, you adopt your tax year (calendar year January 1 to December 31 unless approved via Form 1128) and accounting method, and must keep separate books for each distinct business. Keep all supporting documents as long as needed to prove your return, and keep employment tax records for at least four years.

Use our team's checklist below to keep your books ready for filing. If you want a team to handle your books and return, Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month. Bookkeeping covers unlimited bank and card accounts, monthly reconciliation and statements, and switching from Bench or another service, we start within a week of getting the documents.

• Monthly: Download marketplace settlement reports to record gross sales, sales tax collected, refunds, referral and fulfillment fees, storage fees, and ad spend.
• Monthly: Save supplier commercial invoices, customs and freight-in receipts, and packaging invoices to substantiate Schedule C Line 36 and Line 39 COGS.
• Monthly: Log business vehicle trips (date, miles, and purpose) for the 70 cents/mile (2025) or 72.5 cents/mile (2026) standard rate.
• Quarterly: Check year-to-date net profit and send Form 1040-ES payments by April 15, June 15, September 15, and January 15.
• December 31: Record year-end physical and warehouse inventory counts and valuation for Line 41 closing inventory.
• January 31: Verify your Form 1099-K Payee TIN and Box 1a gross total against your 12 monthly settlement reports, and issue Form 1099-NEC to US contractors paid $600 or more in 2025 ($2,000 or more after 2025).

• IRS: Publication 334 (2025), Tax Guide for Small Business
• IRS: Form 1099-K FAQs: General information