Income tax on FBA profits — how it works
Amazon FBA income is self-employment income. That means two layers of tax apply before the federal and state income tax brackets even enter the picture:
| Tax type | Rate | Applied to |
|---|---|---|
| Self-employment tax | 15.3% of net profit | Social Security + Medicare (both halves) |
| Federal income tax | 10–22% (most sellers) | Net profit added to all other income |
| State income tax | 0–9.3% depending on state | Varies — 9 states have no income tax |
The critical number is net profit — not your gross Amazon sales. Net profit equals revenue minus COGS, FBA fees, storage fees, advertising, and all other ordinary business expenses.
Real example: $80,000 gross sales — $45,000 COGS — $15,000 FBA fulfillment and referral fees — $5,000 advertising = $15,000 taxable profit. At a 30% effective rate (SE tax + federal), that's roughly $4,500 in taxes — not $24,000 on the gross sales figure.
| Item | Amount | Notes |
|---|---|---|
| Gross Amazon sales | $80,000 | What shows on your 1099-K |
| Cost of Goods Sold (COGS) | -$45,000 | Cost of units that actually sold |
| FBA fulfillment + referral fees | -$15,000 | Amazon deducts before depositing |
| Advertising (Sponsored Products) | -$5,000 | Charged separately to your account |
| Taxable net profit | $15,000 | What you actually owe tax on |
You report this on Schedule C attached to your personal Form 1040. The net profit flows into your adjusted gross income alongside any W-2 wages or other income you have.
Note on the SE tax deduction: You can deduct half of your self-employment tax (the "employer-equivalent" portion) from your gross income before calculating income tax. On $15,000 of net profit, the SE tax is $2,295 — and you get to deduct $1,147 of that. It's a small but real reduction built into the system.
Amazon's 1099-K — what it shows and what it doesn't
Amazon issues a 1099-K to sellers who exceed the annual reporting threshold. The thresholds have been in flux:
| Tax year | 1099-K threshold | What changed |
|---|---|---|
| 2023 | $20,000 and 200 transactions | IRS delayed lower threshold again |
| 2024 | $5,000 (any number of transactions) | Transition year, phased rollout |
| 2025 (current) | $2,500 | Continued phase-in |
| 2025 | $2,500 | Further reduction |
| 2026 and beyond | $600 | Original ARPA threshold finally in effect |
The most important thing to understand about the 1099-K: it shows your gross sales, not your profit. If you had $80,000 in gross sales, that's what appears on the form. The IRS also receives a copy. You then subtract COGS and all legitimate business expenses on Schedule C to arrive at the taxable net figure.
The panic moment: Many FBA sellers receive their 1099-K in January and think they owe tax on the full amount. You don't. The 1099-K is just a gross receipts report — the deductions you claim on Schedule C bring it down dramatically. Keep your expense records organized and the gap between your 1099-K and your actual tax liability will make sense.
Even if you fall below the threshold and don't receive a 1099-K, all FBA income is still taxable and must be reported. The threshold determines paperwork, not taxability.
COGS and inventory accounting — the most important concept
Unlike freelancers or gig workers, FBA sellers deal with physical inventory — and that changes how deductions work entirely. You cannot deduct all the inventory you purchase in the year you buy it.
How COGS works in practice
Suppose you buy 100 units at $5 each. Total spend: $500. You sell 70 of those units at $15 each. Here's how the math works:
| Item | Units | Amount |
|---|---|---|
| Units purchased | 100 | $500 total cost |
| Units sold this year | 70 | $1,050 revenue (70 × $15) |
| COGS deducted this year | 70 | $350 (70 × $5) |
| Units remaining (inventory asset) | 30 | $150 — deducted when they sell |
| Gross profit this year | $700 ($1,050 − $350) |
The 30 unsold units sit on your balance sheet as inventory. When they sell — even in a future tax year — you deduct them at that point. This is called matching revenue to expenses.
Inventory tracking methods
The IRS requires you to use a consistent inventory accounting method. The most common for FBA sellers:
- FIFO (First In, First Out) — The first units you purchased are assumed to be the first ones sold. Most common, simplest to track, and generally the IRS default.
- Average Cost — You average all purchase costs and apply that per-unit average to units sold. Useful if your supplier prices fluctuate.
- Specific Identification — Track each unit individually. Rare for FBA sellers; mostly used for high-value one-of-a-kind items.
What to track per SKU: Units purchased, unit cost, date received, units sold this year, units remaining end of year. Even a simple spreadsheet works. Accounting software like A2X or QuickBooks with an Amazon integration makes this automatic.
Deductible FBA expenses
Beyond COGS, a wide range of ordinary and necessary business expenses are fully deductible on Schedule C. FBA sellers often leave money on the table by missing these:
Amazon-charged fees
- FBA fulfillment fees — Typically $3.22–$6.20 per unit depending on size and weight. Fully deductible.
- Monthly inventory storage fees — Charged per cubic foot. Long-term storage fees (inventory over 365 days) are also deductible.
- Referral fees — Amazon's commission of 8–15% on each sale depending on category. Deductible.
- Advertising (Sponsored Products, Sponsored Brands) — All Amazon ad spend is deductible.
- Professional seller account fee — $39.99/month. Deductible.
- Returns processing fees — Deductible.
Outside business expenses
- Product photography — Main and lifestyle images for your listings.
- Software tools — Helium 10, Jungle Scout, Keepa, SellerBoard, A2X, inventory management tools.
- Freight and shipping to Amazon — Inbound shipping costs to FBA warehouses.
- Product inspection and prep services — Third-party prep centers, inspection fees.
- Home office — If you manage your FBA business from a dedicated home office space, a portion of rent/mortgage interest and utilities may qualify.
- Business bank fees and credit card fees — If you use a dedicated business account.
- Legal and accounting fees — CPA fees for business tax prep are deductible.
- Training and education — Amazon FBA courses directly related to your business.
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Check my FBA hustle — free →Sales tax — Amazon handles it for you
This is one of the biggest advantages FBA sellers have over Shopify or independent website sellers: Amazon is a marketplace facilitator in all 50 U.S. states and Washington D.C. That means Amazon collects sales tax from buyers and remits it to the states on your behalf — automatically, for every FBA transaction.
You do not need to:
- Register for sales tax permits in states where Amazon sells your products
- File sales tax returns for your Amazon FBA sales
- Calculate or collect sales tax from customers
What changed the game: After the Supreme Court's 2018 South Dakota v. Wayfair decision, economic nexus rules expanded dramatically — sellers with over $100,000 in a state or 200 transactions could owe sales tax even without a physical presence. For FBA sellers, Amazon's marketplace facilitator status means they absorb this complexity entirely.
Where FBA sellers still need to be careful
Amazon's coverage applies only to sales made through Amazon. If you:
- Sell through your own Shopify or WooCommerce website
- Sell through Etsy, eBay, or other channels not covered by their own facilitator status
- Have employees or physical offices in certain states
...you may have separate sales tax obligations in those states for those channels. Amazon's protection does not extend to off-Amazon revenue.
Amazon provides detailed sales tax reports in Seller Central that show exactly how much tax was collected and remitted by state. Keep those reports — they're useful documentation if questions ever arise.
Quarterly estimated taxes for FBA sellers
If your FBA profits (after all deductions) times approximately 0.30 will exceed $1,000 for the year, the IRS requires quarterly estimated tax payments. The four deadlines:
- April 15 — for income earned January–March
- June 15 — for income earned April–May
- September 15 — for income earned June–August
- January 15 — for income earned September–December
FBA sellers face uneven income. Q4 holiday sales can represent 40–60% of annual revenue for many categories. Don't wait until quarter-end to set money aside — calculate a percentage of each Amazon disbursement and move it to a separate savings account immediately. Many FBA sellers set aside 25–30% of net profit per payout. You'll recalibrate after your first full tax year.
Pay at IRS.gov/payments using Direct Pay (free) or EFTPS. Missing quarterly payments results in underpayment penalties — modest but avoidable.
Frequently asked questions
Does Amazon report FBA sales to the IRS?
Yes — Amazon issues a 1099-K for sellers who exceed the annual threshold ($5,000 in 2024, $2,500 in 2025, $600 from 2026). They also report to state tax authorities. All income must be reported regardless of whether you receive a 1099-K.
When can I deduct inventory I purchased?
Only when the items sell, not when you buy them. This is called Cost of Goods Sold (COGS). Unsold inventory sits on your balance sheet as an asset until those units move. Deducting all inventory at purchase is one of the most common and costly mistakes FBA sellers make.
Are Amazon FBA fees tax deductible?
Yes — all FBA fees (fulfillment, storage, referral) are deductible business expenses on Schedule C. They reduce your net profit and therefore your taxable income directly.
Do FBA sellers need to collect sales tax?
In most states, no — Amazon handles this as a marketplace facilitator. Amazon collects and remits sales tax automatically on all FBA transactions in all 50 states. If you sell through your own website separately, you're responsible for sales tax compliance on that channel.
Should Amazon FBA sellers form an LLC?
At higher revenue levels, yes. FBA businesses have inventory risk and product liability exposure that sole proprietors bear personally. An LLC protects personal assets. At $50,000 or more in gross revenue it's generally worth the modest formation cost — especially for private-label sellers.
The bottom line
Amazon FBA taxes are more complex than most side hustles — but the complexity mostly works in your favor. The 1099-K shows gross sales, but you owe tax only on net profit after COGS and expenses. Amazon handles sales tax in all 50 states. And every fee Amazon charges you, every ad dollar you spend, and every legitimate business tool you use is deductible.
The sellers who overpay are the ones who don't track COGS properly, miss the expense deductions, or panic at their 1099-K number. Get an inventory tracking system in place from day one, keep records organized throughout the year, and the math usually looks much better than the gross revenue number suggests.
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