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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