It all comes down to one simple question…are you making a profit?
If you are selling your own clothes for less than you originally paid for them, then you don’t need to worry about setting up a business or claiming anything to do with Poshmark on your taxes.
Otherwise, you might be responsible for being properly registered and reporting your earnings.
Even if you don’t have a wholesale account with a clothing supplier or sell NWT clothing items, you can still be making a profit.
For example, plenty of sellers frequently shop at their local thrift stores and sell their finds for a profit through Poshmark. That requires a business license.
Some sellers sell clothes for other people and take a cut of the sale price. Even if the item was sold for less than it cost, you are making money from your selling fee.
If you are making a profit on Poshmark, first of all, congrats! That’s pretty awesome! But make sure you complete the following action items to be sure that you are operating legally.
*Disclaimer: I am not a business lawyer and am only sharing my own understanding, which could potentially be inaccurate. For the most accurate information, especially in regards to the state you live in, contact a local business attorney to make sure you have your bases covered.
Register as a business with your state
This process will be slightly different with every state, but you will need to register yourself as a business entity. If you are selling on Poshmark by yourself and don’t plan to hire employees, it will usually be the easiest (and simplest) to register as a Sole Proprietorship or an LLC (limited liability company).
A lot of places let you register your business online, so it’s actually crazy easy to do. When registering as a Sole Proprietorship, you generally just have to provide your contact information, social security number and some information about what your business will be doing.
If you are selling inventory for a profit, then you will be a retail business.
Depending on your state and the type of business entity that you register, you may have to pay a registration fee. Also, check to see whether or not you will need to pay a renewal fee and how often.
Once you have fully registered, you should have an EIN that allows the IRS to identify your business for tax purposes.
Get your retail license or sales tax registration
This one definitely varies between states, but you will most likely need to complete some form to officially register as a retailer. This will provide you with a license or registration number that is different from the EIN. This number is basically your sales tax ID for the state. It also lets your suppliers know that they don’t have to charge you sales tax since you are buying inventory to resell and not buying things for yourself to keep.
You will need to keep track of all your expenses and sales to accurately file your taxes at the end of the year. Expenses can include:
- the original cost of your inventory
- Poshmark fees
- cost of shipping supplies (boxes, tape, labels)
- cost of packing materials (tissue paper, wrapping paper, ribbon, stickers, cards, etc.)
- any staging props that you use SOLELY for your Poshmark business (mannequin, rug, lighting)
You may also be able to deduct home office use, but only if you use a part of your home for just Poshmark and nothing else. There are plenty of other blog posts out there that explain what qualifies for a home office deduction and how to file it.
For your sales, you will need to report the actual sale price. Not just what Poshmark paid you. This is important for determining sales tax if you sold to anyone in your own state.
Quickbooks – My Favorite Way to Keep Track of it All
My favorite way to keep track of all the finances for a business is with Intuit’s Quickbooks. I personally use Quickbooks online because I like having the ability to log in from anywhere, but the downloaded version is great too.
As long as you are diligent with entering your expenses and sales into Quickbooks, the software can offer you some pretty powerful benefits. It can pull together all sorts of profit and loss reports for you and analyze your finances over any date range that you provide.
When it comes time to file your taxes, Quickbooks will have everything you need all in one place. You can even share your data for the year with a trusted tax account so they can make sure you don’t miss out on important tax deductions.
The key to benefiting from Quickbooks is to start using it earlier in the year. Better yet, start using it as soon as you start operating as a business.
My husband has a business for 3-D printing and he didn’t get Quickbooks until 2 days before we were supposed to meet with our tax accountant to file the year-end return. We ended up staying up all night and spent hours entering in all the data…prices, earnings, fees, transaction IDs, receipt numbers. It was kind of crazy, but now that it is all set up, next year, we basically just need to click a button to run a report and we will be done.
I also love that I can track profits and losses for each month. That way, I know how much to set aside from the business for potential taxes at the end of the year. (Another hint: Talk to a local tax accountant about what tax liabilities you might have as a small business owner)
Again, talk to a local business lawyer and/or tax accountant
Everyone’s situation is going to be a little bit unique, so the best option is to start off with the best advice. The most reliable way to get that is to go directly to meet with a business lawyer and/or tax accountant in your own state.
You will be so glad you did this. It will give you peace of mind that you are operating legally and that you won’t be hit with surprise taxes or fines later on.