Overview

Marketplace sellers—from hobbyists on Etsy to businesses selling on Amazon or eBay—must keep clear, reliable records that show the full picture of their sales and business expenses. Good recordkeeping reduces tax errors, speeds up tax preparation, and makes audits far less painful. The IRS describes recordkeeping as the foundation of accurate tax reporting and recommends keeping records that show income, deductions, credits, and account basis (IRS.gov: Recordkeeping) (https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping).

Why recordkeeping matters for marketplace sellers

  • Tax compliance: Records substantiate amounts reported on Schedule C, Forms 1099, and other returns.
  • Reconciliation of platform reporting: Marketplaces frequently send transaction and tax forms (e.g., Form 1099-K or marketplace-specific statements). Sellers must reconcile platform totals with their own books to detect missing sales, refunds, or fee errors.
  • Audit protection: Organized records reduce the time and cost of responding to IRS or state inquiries.
  • Business insights: Good records reveal profit margins, seasonal trends, and inventory needs—helpful for pricing and growth decisions.

Core records to keep (detailed list)

  1. Sales and transaction records
  • Marketplace reports and settlements (download monthly and annual statements).
  • Order details showing date, SKU, item description, quantity, gross sales, discounts, refunds, and fees.
  • Copies of issued invoices or packing slips where applicable.
  1. Income substantiation
  • Bank and merchant account deposits that match sales periods.
  • PayPal or third-party processor statements.
  1. Expense documentation
  • Receipts and invoices for materials, shipping, packaging, software subscriptions, advertising, contract labor, and other ordinary business expenses.
  • Proof of payment (credit card statements, canceled checks, ACH records).
  1. Inventory and cost of goods sold (COGS)
  • Beginning and ending inventory records, purchase receipts for cost of materials, and documentation of goods sold or disposed.
  • Records supporting inventory valuation method (FIFO, LIFO, or specific identification).
  1. Asset and depreciation records
  • Receipts and depreciation schedules for equipment, computers, and other capital assets.
  1. Payroll and contractor records
  • If you have employees, keep payroll tax returns, W-2s, and Forms 941 or 944; for contractors, retain Forms 1099-NEC and contracts.
  1. Tax filings and supporting workpapers
  • Copies of filed federal and state tax returns, workpapers, schedules, and correspondence with tax authorities.
  1. Sales tax and license records
  • Sales tax permits, collected sales tax logs, filed returns, and exemption certificates.

Digital vs. paper records: what the IRS accepts

The IRS accepts electronic records if they are accurate, readable, and can be provided on request. Use a consistent folder structure and maintain backups. For example, keep a monthly folder with a subfolder for marketplace statements, receipts, and bank reconciliations. Back up to cloud storage and keep an offline copy for redundancy (IRS: Recordkeeping) (https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping).

Retention periods — practical guidance

IRS guidance varies by circumstance; use these general rules as a baseline:

  • Keep records for 3 years after you file your tax return in most cases (typical statute of limitations).
  • Keep records for 6 years if you underreport gross income by more than 25%.
  • Keep records for 7 years for claims related to bad debt or worthless securities.
  • Keep employment tax records for at least 4 years after the tax is due or paid.
  • Keep records relating to property (depreciation, basis) until the period of limitations expires for the year you dispose of the property.
    These are summaries of IRS guidance; complex situations may require longer retention. See the IRS recordkeeping page for details (https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping).

For more on how long to hold specific documents, see our companion guide: Recordkeeping for Taxes: Documents to Keep and How Long (https://finhelp.io/glossary/recordkeeping-for-taxes-documents-to-keep-and-how-long/).

Reconciling marketplace reports and tax forms

Marketplaces publish settlement reports and may issue information returns. Steps to reconcile:

  1. Download monthly settlement reports from each platform and import them into your accounting system.
  2. Match sales to daily deposits and to bank/processor statements; flag timing differences (e.g., fees withheld by platform or pooled payouts).
  3. Reconcile marketplace-issued Forms 1099 (or platform tax summaries) against your gross receipts. If totals differ materially, research refunds, chargebacks, or unreported channels.
  4. Keep a reconciliation worksheet showing your adjustments and explanations—this is invaluable if the IRS questions your numbers.
    Note: Platform reporting rules have changed in recent years. Always check IRS guidance and platform notices for current thresholds and reporting requirements.

Accounting systems and tools that simplify compliance

  • Accounting software: QuickBooks, Xero, and e-commerce-specific tools can connect to marketplaces to import orders and fees.
  • Inventory management: Use software that links purchases to COGS and keeps lot-level data for high-value items.
  • Receipt capture: Mobile apps and OCR scanning reduce manual entry—tag receipts to categories and attach to transactions.
  • Backups and exportability: Choose systems that allow exporting raw data and PDFs for audit-ready packages.

In my work advising online sellers, the firms that adopt a ‘‘books-every-week’’ habit reduce year-end stress and misstatements. Automating bank feeds and daily order imports cuts reconciliation time by more than half.

Common pitfalls and how to avoid them

  • Treating personal and business transactions the same: Always separate business bank cards and accounts.
  • Missing fees and refunds: Record them as separate line items; they affect net income and may reduce 1099 totals.
  • Ignoring inventory tracking: Failing to track inventory inflates COGS errors and taxable income.
  • Relying only on platform totals: Platforms sometimes miscategorize fees or exclude certain sales—retain original order-level detail.
  • Deleting digital receipts: Keep originals or backups; screenshots or PDFs are acceptable if legible.

Audit readiness: what to prepare

If contacted by the IRS, provide a clear package:

  • A cover letter explaining your business model and fiscal year.
  • Sales registry (by month) reconciled to bank deposits and platform reports.
  • Expense ledgers with attached receipts for large or disputed deductions.
  • Inventory worksheets and COGS calculation.
    Keeping this packet up to date before an audit request dramatically shortens resolution time.

Sample annual recordkeeping workflow (checklist)

  • Monthly: Download marketplace settlements, import to accounting software, reconcile bank and processor deposits.
  • Quarterly: Reconcile sales tax collected and remit if required; review inventory counts and adjust COGS.
  • Year-end: Close books, run profit-and-loss and balance sheet, reconcile to bank statements, collect year-end receipts and asset invoices for depreciation.
  • After filing: Archive PDFs of filed returns, 1099s, and a reconciliation memo for the year.

Real-world example

A client selling custom furniture on multiple platforms received a 1099-K that exceeded his bookkeeping records due to bundled refunds and shipping reimbursements. Because he kept per-order details and a reconciliation worksheet, we matched the difference to refunded orders and platform shipping credits—avoiding an IRS adjustment and penalty.

When to get professional help

Consult a CPA or tax attorney if you encounter:

  • Large discrepancies with marketplace reporting or unexplained income items.
  • Complex inventory valuation or significant capital asset transactions.
  • State sales tax nexus questions or multi-state filing obligations.
    A professional can help set up a defensible recordkeeping policy and prepare audit response packages.

Links to related guidance

Sources and authority

Professional disclaimer

This article is educational and does not constitute tax, legal, or accounting advice. Rules change and facts differ by situation—consult a qualified CPA or tax advisor for advice tailored to your circumstances.