Stripe & PayPal Sellers: Find Winning Products Fast!

Introduction

Sourcing the right products is the cornerstone of success for Shopify merchants using Stripe and PayPal. But beyond demand and margins, understanding the tax implications of product costs – from COGS to platform fees – can dramatically boost your bottom line. In this guide, we’ll show you how to identify winning products and optimize your tax treatment in 2025, so you can scale confidently.

Tax Code References

• Cost of Goods Sold (IRC §§ 471 & 263A): You must capitalize direct product costs (purchase price, freight-in) and allocable indirect costs (packaging, storage) into inventory until sold.
• Ordinary & Necessary Expenses (IRC § 162): Deduct sourcing subscriptions, sample fees, and transaction fees from Stripe and PayPal as business expenses.
• Qualified Business Income (IRC § 199A): Reducing your net income via valid expenses may increase your 20% QBI deduction.
• Self-Employment Tax (IRC § 1401): Net earnings – including profit on sourced products – are subject to Social Security and Medicare taxes.

Relevant Forms

• Form 1040, Schedule C: Report gross receipts, COGS, and deductible expenses (platform fees, sourcing tools).
• Schedule SE (Form 1040): Calculate self-employment tax on net profit.
• Form 1099-K: Stripe and PayPal issue this for qualifying transactions; reconcile to your records.
• Form 4562: Claim Section 179 or depreciation if you purchase equipment (e.g., barcode scanners).
• Form 1040-ES: Make quarterly estimated tax payments to avoid penalties.
• State Sales Tax Returns: File where you have nexus and collect tax on product sales.

Detailed Example

Scenario: TrendyTech sources wireless earbuds for resale on Shopify in 2025, taking payments via Stripe and PayPal.

• Initial Order: 1,000 units @ $15/unit = $15,000
• Freight-In & Customs: $1,500
• Packaging & Labeling Samples: $500
• Sourcing Platform Subscription: $600/year
• Stripe & PayPal Fees: 2.9% + $0.30 per transaction
• First-Wave Sales: 600 units @ $35/unit = $21,000 gross receipts

Tax Impact:

1. COGS (IRC §§ 471/263A):
   • Direct = $15,000 + $1,500 = $16,500
   • Ending Inventory (400 units × $16.50) = $6,600 capitalized
   • COGS for sold units = $16,500 − $6,600 = $9,900
2. Deductible Expenses (IRC § 162):
   • Sourcing subscription = $600
   • Sample costs = $500
   • Transaction fees (~$693)
3. Net Profit Before Tax:
   • $21,000 − $9,900 − $1,793 (other expenses) = $9,307
4. QBI Deduction (IRC § 199A):
   • 20% × $9,307 ≈ $1,861 additional tax savings

Step-by-Step Compliance Guide

1. Validate Product Demand & Margins
   • Use tools like Jungle Scout or Helium 10; aim for ≥30% gross margin after all fees.
2. Track All Costs in Real Time
   • Record purchase price, freight, sampling, and platform fees in your accounting system.
3. Configure Inventory Costing
   • Set up FIFO or weighted-average costing in Shopify per IRC §§ 471/263A.
4. Reconcile 1099-K Reports
   • Monthly, match Stripe and PayPal 1099-K amounts to your Shopify sales records; adjust for refunds.
5. Deduct Valid Business Expenses
   • Expense sourcing subscriptions, sampling fees, and transaction costs on Schedule C.
6. Consider Equipment Deductions
   • If you buy scanners or label printers, elect Section 179 on Form 4562.
7. Manage Sales Tax
   • Register and collect in nexus states; file returns per state rules.
8. Pay Quarterly Estimates
   • Cover income and self-employment tax via Form 1040-ES deadlines (4/15, 6/15, 9/15, 1/15).
9. Maintain Organized Records
   • Retain invoices, subscription agreements, 1099-Ks, and tax filings for at least four years.

Conclusion

By integrating product-sourcing best practices with precise tax treatment – capitalizing COGS, deducting valid expenses, and leveraging QBI – you’ll identify winners faster and keep more profit in your pocket. Follow these steps in 2025 to streamline sourcing and compliance.

Ready to Source Smarter & Save More?

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Disclaimer

Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and an Enrolled Agent authorized to practice before the IRS. He represents clients in tax litigation and specializes in e-commerce and cross-border tax planning. This blog is for informational purposes and does not constitute professional advice.

About Our CPA

With over a decade of U.S. and international tax expertise, Anshul Goyal helps online sellers optimize sourcing, inventory accounting, and tax strategies to fuel scalable growth.

Frequently Asked Questions

1. How do I allocate freight-in to COGS?
Add freight costs to your inventory basis and include in COGS when items sell (IRC §§ 471/263A).

2. What if my 1099-K overstates receipts?
Reconcile for refunds/chargebacks; report net sales on Schedule C and attach an explanation.

3. Can I deduct my sourcing tool subscription?
Yes – fully deductible as an ordinary business expense under IRC § 162.

4. When must I elect Section 179?
Assets must be placed in service by December 31, 2025 to qualify.

5. How do I increase my QBI deduction?
Reduce net taxable income via valid expenses and consider entity elections.