If you run a profitable eBay business, full-time or part-time, you may be able to gain tax relief and build up retirement savings through a qualified retirement plan and/or IRA. For example, if you net $40,000 from an eBay business and make a tax-deductible contribution of $5,000 to a retirement plan, you only pay income tax now on $35,000. If you're in the 25% tax bracket, the write-off essentially means that the contribution is only costing you $3,750 out-of-pocket; the government is contributing $1,250 through the taxes you save by making the contribution.
The type of plan you use and the amount of money you put into it depends on several factors, including how much you want or can afford to save, whether you have other retirement plans, whether you have employees, and your years until retirement. Here are just three options to consider:
The 401(k) Plan
If you want to put away as much as possible on a tax-advantaged basis, look closely at this plan. The paperwork for the plan must be signed no later than the end of the year to which contributions relate (so it's too late now to open a 401(k) plan for 2006). As long as the plan has been set up on time, you then have until the extended due date of your income tax return to actually put the money into the plan.
Where earnings permit, the maximum contribution for 2007 is $15,500, plus $5,000 for if you are age 50 or older by the end of 2007. The amount is not deductible; it is simply not included in income for the year. In addition, you can add an "employer contribution" (even if you're self-employed), to bring the total contributions for the year up to $45,000 ($50,000 if 50 or older).
Caution: Those who run their eBay business part-time and work a full-time job with a 401(k) plan must apply these contribution limits to a combination of both plans - those maxing out at work will not be able to shelter eBay business income by setting up a 401(k) plan for it.
The SEP (Simplified Employee Pension) Plan
You can contribute up to 25% of wages (or 20% of net earnings from the business) in 2007, up to a limit of $45,000 (the 2006 limit is $44,000). Even if you are covered by a company plan at a day job, contributions to your eBay business plan are not limited in most cases by company coverage.
IRAs
You can contribute up to $4,000 ($5,000 if age 50 or older by year-end). A deductible contribution is allowed if you do not participate in a company plan or if you do but have income below a threshold amount. Alternatively, whether or not you are covered by a company plan, you can contribute to a Roth IRA - while there's no current deduction, income builds up to become tax free.
Caution: Roth IRA contributions are allowed only if overall income for the year does not exceed set limits.
Last minute opportunities for 2006 returns
Even though the tax year for 2006 has closed, the ability to fund retirement plans for tax advantage on 2006 remains open. Assuming you are eligible, you can set up and contribute to a traditional or Roth IRA up to the due date of the 2006 income tax return, which is April 17, 2007 - you do not gain more time if you obtain a filing extension.
SEPs can be set up and funded through the extended due date of your return, so if you have a filing extension until October 15, 2007, you can sign the paperwork for a SEP for 2006 and make deductible contributions to it by this date.
Final word
All retirement plans are based on earned income - from a job or a business. Those who are only casual sellers on eBay do not have earned income from this source and cannot shelter eBay income in a retirement plan.
Similarly, if your eBay business has not been profitable (your expenses exceeded your income for the year), you usually cannot make a retirement plan contribution.
For more details, see IRS Publication 560, Retirement Plans for Small Business and IRS Publication 590, Individual Retirement Arrangements:
http://www.irs.gov
