Selling Online in 2025? This Legal Setup Could Save You From IRS Trouble

Introduction

Selling online is easier than ever in 2025, but ignoring the legal structure and IRS compliance can sink your business fast. Whether you’re on Shopify, Amazon, Etsy, eBay, or multiple platforms, proper legal registration, IRS filings, and document retention are essential. This blog explains the legal setup that protects online sellers, which IRS forms to file, and how to stay fully compliant and audit-proof.

IRS & Legal Code References

Key IRS codes and legal compliance rules:

• IRC §61(a): All gross income from online platforms is taxable.
• IRC §6001: Sellers must maintain proper records and books.
• IRC §301.7701-2(b): Defines the classification of business entities (e.g., sole proprietorship, partnership, corporation).
• IRC §6050W: Requires payment processors to issue Form 1099-K for payments over $600 annually.
• State Business Law: Requires formal registration (LLC, Corporation, or DBA) in your operating state.

Relevant IRS Forms

• Form SS-4: To apply for an Employer Identification Number (EIN).
• Schedule C (Form 1040): Report business income and expenses.
• Form 1099-K: Sent by processors like PayPal, Stripe, or Shopify.
• Form 8829: Deduct home office expenses.
• Form 8995: For claiming the QBI deduction.
• Form 1120 or 1065: For incorporated businesses or partnerships.

Real-Life Example: Compliance Setup for an Online Seller

Case: Priya, an Etsy + Amazon seller in Texas

• 2024 sales: $75,000
• Initially operated as an individual without an EIN or business registration.
• Faced IRS confusion when multiple 1099-Ks were issued under her SSN.
• In 2025, she:
  • Registered an LLC in Texas
  • Applied for an EIN using Form SS-4
  • Switched her payment accounts to the business EIN
  • Filed Schedule C correctly
  • Claimed QBI deduction via Form 8995

This new setup not only reduced audit risk but allowed her to apply for business credit and deduct additional expenses.

Step-by-Step Legal & Tax Compliance Guide

1. Choose Your Legal Structure:
   • Sole Proprietor, LLC, S Corporation, or C Corporation
   • Consider liability, taxes, and state requirements
2. Register Your Business:
   • File with the Secretary of State (or local government)
   • Get a DBA if you’re using a trade name
3. Apply for an EIN (Form SS-4):
   • Essential for business banking, payroll, and receiving 1099-K under your business entity
4. Open a Business Bank Account & Payment Processor Account:
   • Keep business and personal finances separate
5. Track All Income & Expenses:
   • Use cloud accounting tools like QuickBooks or Xero
6. File the Correct Forms:
   • Schedule C for sole proprietors
   • 1120/1065 for corporations/partnerships
   • Attach all relevant forms (8995, 8829, 4562)
7. Stay State Compliant:
   • File annual reports, renew licenses, and stay updated on sales tax registration where nexus applies

Conclusion

In 2025, the IRS and state agencies are watching online sellers more closely. Setting up your business properly both legally and for tax purposes can save you from audits, penalties, and lost deductions. Don’t wait until the IRS sends a notice. Make sure your business is registered, structured, and filed correctly.

Call-to-Action and Disclaimer

Not sure if your online business is set up legally?

Schedule a 1-on-1 consultation with Anshul Goyal, CPA to ensure you’re compliant, protected, and ready to grow.
Book here: https://calendly.com/anshulcpa/

Disclaimer: This blog is intended for general informational purposes only and should not be construed as legal or tax advice. Please consult a licensed CPA or legal advisor for personalized recommendations.

Anshul Goyal, CPA EA FCA is licensed in the U.S., admitted to practice before the IRS, and specializes in helping American eCommerce businesses and Indian founders in the U.S. with full legal, accounting, and IRS compliance services.

Top 5 FAQs

1. Do I need an LLC to sell on Amazon or Shopify?
Not required, but highly recommended for liability protection and IRS reporting clarity.

2. What if I sell on multiple platforms do I need separate legal entities?
No, but you must report all combined income and track expenses across platforms.

3. Can I use my SSN instead of getting an EIN?
You can as a sole proprietor, but using an EIN keeps personal and business matters separate and reduces audit confusion.

4. What is the penalty for unregistered businesses?
Penalties vary by state. You may face fines, back taxes, and disqualified deductions if caught.

5. Do I need a business license to sell online?
Some states and cities require one, even for online-only businesses. Check with your local business office.

About Our CPA

Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant and IRS Enrolled Agent. He also holds a Chartered Accountant credential from India. With more than 15 years of experience, Anshul has helped thousands of online sellers and digital entrepreneurs navigate IRS rules, business structure, tax filings, and legal registrations.

Email: anshul@kkca.io
Schedule a call: https://calendly.com/anshulcpa/
Website: www.kkca.io