Quick overview

Online sellers face overlapping obligations: federal income and self-employment tax (IRS), state sales and use tax rules, and marketplace-specific collection laws. The most costly mistakes are predictable and fixable with a mix of registration, good records, automated tools, and periodic professional reviews.

The top mistakes and how to fix each one

  1. Not registering for or collecting required state sales tax
  • Problem: Sellers assume no physical presence = no sales tax. After the Wayfair decision many states use economic nexus tests that can require collection even without a physical location.
  • Fix: Run a nexus test for each state where you have customers. If you meet a state’s threshold, register for a sales tax permit and begin collecting. Many sellers use automated services (e.g., Avalara, TaxJar) or marketplace settings to calculate and collect tax. See our guide to Sales Tax Responsibilities for Online Sellers Across States for state-by-state considerations.
  1. Ignoring marketplace facilitator rules
  • Problem: Marketplaces (Amazon, Etsy, etc.) may collect and remit tax for some transactions but not others. Relying on the marketplace without verifying your reporting can leave gaps.
  • Fix: Review the marketplace’s tax remittance policy for each platform you use and reconcile marketplace reports with your sales platform. Our article on Sales Tax Compliance for Marketplace Sellers: Registration and Reporting explains common traps.
  1. Misreporting income or mishandling returns/refunds
  • Problem: Including refunded sales as revenue, omitting platform fees, or misclassifying personal withdrawals inflates or deflates taxable income incorrectly—triggering audits or missed deductions.
  • Fix: Use accrual or cash accounting consistently, record gross sales and then separate refunds and fees. Reconcile monthly bank statements to your books.
  1. Poor or incomplete recordkeeping
  • Problem: Missing invoices, receipts, and shipping records make it hard to substantiate deductions or defend against audits.
  • Fix: Build an audit-ready system: retain sales records, cost-of-goods-sold documentation, invoices, shipping logs, and contracts for at least three years (longer for complex issues). See our practical steps in Record keeping for taxes. The IRS also recommends keeping accurate records and provides guidance for small businesses (irs.gov/businesses/small-businesses-self-employed).
  1. Failing to pay estimated federal (and state) taxes
  • Problem: Self-employed sellers who don’t pay quarterly estimated taxes face penalties and interest.
  • Fix: Estimate quarterly liability using prior-year income or projected profits; make timely payments to avoid underpayment penalties. Work with a CPA to set withholding or estimated payments if profits grow.
  1. Using personal accounts for business finances
  • Problem: Mixing personal and business funds obscures true profit and can jeopardize limited-liability protection.
  • Fix: Open a dedicated business bank account and payment-processing account. Reconcile accounts monthly.

Practical, prioritized action plan (first 30–90 days)

  • Day 1–7: Export sales by state (platform reports) and compare to known nexus thresholds for each state.
  • Day 8–30: Register for required sales tax permits and enable collection settings on each sales channel.
  • Month 1–2: Implement accounting software (QuickBooks, Xero) and connect payment processors.
  • Month 2–3: Reconcile prior-year returns, correct material errors (amend tax returns if needed), and set up automated sales-tax tools.

Short checklist to reduce audit risk

  • Register and collect where required.
  • Separate business accounts and track every transaction.
  • Reconcile marketplace reports with your books.
  • Pay estimated taxes if self-employed.
  • Keep organized, date-stamped records for at least three years.

Common questions sellers ask

  • Who is responsible for collecting sales tax: the marketplace or the seller?
    Answer: It depends. Marketplace facilitator laws mean marketplaces collect in many states, but sellers often remain responsible for registration and reporting in some scenarios—always confirm per-platform and state guidance.

  • How long should I keep tax records?
    Answer: The IRS generally recommends keeping most records for three years, but keep records longer if there’s a chance of unfiled returns or substantial losses (see IRS guidance at irs.gov).

Real-world example (brief)

A craft seller I worked with had years of small out-of-state sales. After reviewing platform reports we discovered economic nexus in two states; registration and corrected returns reduced the seller’s surprise liability compared with the potential penalties they were facing during an audit.

Recommended resources and tools

Professional disclaimer: This content is educational and does not replace personalized tax or legal advice. Tax rules change by state and federal statute; consult a qualified CPA or tax attorney for advice tailored to your situation.