Online Business Taxation: Are You Reporting Amazon and Etsy Income Correctly?
Online business taxation has become a critical issue for Americans in Israel operating digital stores. With the growing popularity of platforms like Amazon, Etsy, and Shopify, many find themselves confused about dual reporting obligations—both to US tax authorities and Israeli authorities. The central question is: Are you reporting all income from your online business correctly?
Suggested image: Illustration of a person sitting in front of a computer with logos of Amazon, Etsy, and Shopify in the background | Alt: Online business taxation for Americans in Israel
Understanding the Legal Structure of Your Online Business
Before diving into taxation details, it is essential to understand the legal structure of your online business. Are you operating as a Sole Proprietorship, LLC, or Corporation? Each structure creates different reporting obligations. Most Amazon and Etsy sellers start as Sole Proprietors, which means income is reported directly on their Form 1040.
If you have chosen to establish an LLC, the situation becomes more complicated. Forming an LLC can offer legal protection, but creates additional reporting obligations. It is important to remember that the IRS treats a single-member LLC as a “Disregarded Entity” for tax purposes, unless you have chosen to be taxed as a corporation.
Reporting eCommerce Platform Income to US Tax Authorities
All income from online businesses must be reported to the IRS, regardless of amount. Amazon, Etsy, and Shopify issue Form 1099-K to accounts that exceed the minimum threshold. As of tax year 2025, the threshold is $600 in annual income, a significant decrease from the previous threshold.
It is important to note that even if you do not receive a Form 1099-K, you are still required to report all income. The platforms send a copy of the form to the IRS as well, so they know exactly how much you earned. Failure to report can result in an audit and substantial penalties.
Deducting Business Expenses: What Is Allowed and What Is Not
One of the major advantages of running an online business is the ability to deduct legitimate business expenses. Amazon and Etsy selling fees, shipping costs, raw materials for product manufacturing, and even a portion of home expenses (if you have a home office)—all of these can be deducted from taxable income.
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However, be careful with unjustified deductions. The IRS scrutinizes business expenses carefully, especially for home-based businesses. Every expense must be “ordinary and necessary” to the business, and you must maintain accurate documentation of each expense.
Double Taxation: Dealing with Israeli Reporting Obligations
As US citizens living in Israel, you must report online business income to Israeli tax authorities as well. Israel requires reporting of worldwide income, including income from foreign digital platforms. This creates a potential double taxation situation.
Fortunately, there is a tax treaty between the US and Israel to prevent double taxation. This means you can claim a credit for taxes paid in one country against your tax liability in the other country. However, the calculation is complex and requires careful planning.
Handling VAT and Local Sales Taxes on Digital Sales
Another complex issue is VAT on digital sales. If you sell physical products through Amazon or Etsy to customers in Israel, you may be liable for Israeli VAT. The rules vary depending on the type of product, storage location, and sales volume.
In the US, the situation is even more complicated. Following the Supreme Court decision in South Dakota v. Wayfair, many states require online sellers to collect Sales Tax even if they have no physical presence in the state. Each state has set a different threshold for Sales Tax liability.
Reporting Foreign Business Accounts: FBAR and FATCA
If your online business maintains bank accounts outside the US (including in Israel), you must file additional reports. FBAR reporting is required for any foreign account with a balance exceeding $10,000 at any time during the year.
Additionally, FATCA reporting on Form 8938 is required for foreign assets above certain amounts. The amounts vary depending on marital status and place of residence. Failure to report foreign accounts can result in penalties of up to $12,921 per unreported account.
Advanced Tax Planning for Online Businesses
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Online businesses offer unique tax planning opportunities. For example, if you sell products you manufacture, you can benefit from the Section 199A deduction, which allows a deduction of up to 20% of qualified business income. This is a significant savings that many do not take advantage of.
Another strategy is timing income and expenses. If you anticipate a particularly good year, you can consider purchasing business equipment or investing in inventory toward year-end to deduct expenses from current income.
Common Pitfalls and How to Avoid Them
One of the most common pitfalls is failing to separate personal and business expenses. If you use your personal bank account for business as well, it creates documentation problems and can result in rejection of legitimate deductions. Open a separate business bank account, even if you are a Sole Proprietor.
Another pitfall is failing to maintain accurate records. The IRS requires detailed documentation of all business income and expenses. Use accounting software like QuickBooks or at least a well-organized spreadsheet. Keep receipts, invoices, and documentation of every transaction.
Impact of Legislative Changes on Online Business Taxation
Legislation regarding online business taxation changes constantly. For example, the reduction of the Form 1099-K threshold to $600 beginning with tax year 2025 means more sellers will receive forms and be under closer IRS scrutiny.
In Israel, changes are also occurring. Israeli tax authorities are strengthening enforcement on income from foreign digital platforms, particularly in light of international information-sharing agreements. It is important to stay updated on changes and adjust your reporting accordingly.
When to Hire a Professional Tax Advisor
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If your online business annual revenue exceeds $50,000, or if you sell in multiple US states, it is highly recommended to hire a professional tax advisor specializing in international taxation. The cost of professional advice is usually significantly lower than the cost of tax mistakes or IRS penalties.
An experienced tax advisor can help you identify tax savings opportunities, ensure full compliance with tax laws in both countries, and develop long-term tax strategies. The 2025 tax filing season is already open, and it is important to start preparing early.
Critical Deadlines and Filing Dates
The standard filing deadline for Form 1040 is April 15, 2026 for tax year 2025. However, Americans living abroad are entitled to an automatic two-month extension, extending the deadline to June 15, 2026. If you need an additional extension, you can file a request for extension on Form 4868.
It is important to remember that an extension to file is not an extension to pay taxes. If you owe taxes, they must be paid by April 15, 2026, or you will be charged interest and penalties. Plan ahead and set aside money for tax payments.
Frequently Asked Questions (FAQ)
Do I have to report Etsy income if it is less than $600?
Yes, you must report all business income, regardless of amount. The $600 threshold only determines when the platform must send you a Form 1099-K, but it does not exempt you from the reporting requirement.
How do I handle VAT on sales through Amazon to Israel?
If you sell physical products to customers in Israel, you may be liable for Israeli VAT. The rules depend on sales volume and product storage location. It is recommended to consult with an Israeli tax advisor.
What happens if I forgot to report online business income in previous years?
If you discover you did not report income in previous years, it is important to correct the situation as soon as possible. The Streamlined Procedures program allows Americans abroad to correct missing reports with reduced or no penalties.
Can I deduct computer equipment expenses for my online business?
Yes, computer equipment used exclusively for business can be fully deducted. If the computer is used for both business and personal purposes, you can only deduct the business portion. You must maintain accurate documentation of business use.
What is the difference between Sole Proprietorship and LLC for tax purposes?
A Sole Proprietorship reports income directly on Form 1040 using Schedule C. A single-member LLC is treated as a “Disregarded Entity” and reports the same way, unless you choose to be taxed as a corporation. The main difference is legal protection, not taxation.
How do I calculate self-employment tax on online business income?
Online business income is subject to self-employment tax of 15.3% on net profit. The tax is calculated on Form Schedule SE. It is important to remember that this tax is in addition to regular income tax.
When do I need to start making estimated tax payments?
If you expect to owe more than $1,000 in taxes for tax year 2025, you must make quarterly estimated tax payments. Payments for 2026 are due on January 15, April 15, June 15, and September 15, 2026.
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Summary: The Smart Way to Handle Online Business Taxation
Online business taxation for Americans in Israel is a complex field requiring deep understanding of tax laws in both countries. The golden rule is accurate documentation, full reporting, and complete transparency with tax authorities. Do not try to save money by compromising compliance—the cost of non-compliance is always higher than the cost of professional advice.
Remember that technology makes it easier for tax authorities to track income from digital platforms. The days of “forgetting” to report online income are long gone. Transparency and full compliance are the only way to ensure peace of mind and avoid problems with tax authorities.
For more information and updates on US tax laws, visit the official IRS website or the US Department of Treasury website. For questions about your specific situation, it is recommended to consult with a professional tax advisor specializing in international taxation.