Tax for E-commerce & Dropshipping Sellers: COGS, the 1099-K, and the S-Corp Move

Online sellers leave more on the table than almost anyone — because e-commerce has moving parts (inventory, fees, the 1099-K) that get mishandled. Here's how to keep more of it.

Cost of goods sold is your biggest lever

Unlike service businesses, you get to deduct COGS — what you paid for the inventory you actually sold. Track product cost, inbound shipping, and packaging carefully; it lowers taxable profit dollar for dollar.

Deductions e-commerce sellers overlook

• Platform & marketplace fees — Shopify, Amazon, Etsy, eBay, plus payment processing.

• Advertising — Meta, Google, TikTok, and influencer spend (often a seller's largest expense).

• Shipping & packaging — outbound shipping, boxes, labels, and supplies.

• Software & apps — inventory, bookkeeping, email, design, and store apps.

• Home office or storage/warehouse space.

• Equipment & Section 179 — computer, camera, printer.

• Returns, refunds, and merchant/professional fees.

Watch the 1099-K and sales tax

For 2025 the 1099-K threshold reverted to $20,000 / 200 transactions — but you owe tax on real profit regardless of whether a form is issued. And selling into multiple states can create sales-tax nexus; get that mapped early so it doesn't become a back-tax problem.

When an S-corp pays (about $75K net)

Once your store nets about $75K or more after COGS, an S-corp election usually wins: reasonable salary plus distributions that avoid the 15.3% SE tax — roughly $6,120/yr saved at $80K net, about $10,710 at $150K, net of 1120S prep, payroll, and state items.

That's exactly what we do — free — in a 15-minute review. All State Tax Resolution is Enrolled-Agent prepared and a QuickBooks Platinum ProAdvisor.

Get your free review: fill out the quick form on our site, or call or text (323) 900-0305.

Informational only, not individualized tax advice; your situation may differ.

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Common Questions

What if I lost receipts for business expenses?

You can rebuild records from bank and card statements, supplier invoices, platform reports and emails. When records are truly lost, courts sometimes allow a reasonable estimate (the Cohan rule), but not for travel, gifts and certain vehicle expenses, which need specific records. Keep organized records going forward, since the IRS expects them for as long as a year can be examined.