Yes, gross sales include shipping charges for tax purposes. If a customer pays you $50 for a product and $8 for delivery, your gross sales figure is $58. The $8 you later hand to the carrier is a separate business expense you deduct elsewhere on your return, not a reduction of the revenue you report.
Why the Shipping Fee Counts as Revenue
Gross sales (sometimes called gross revenue or gross receipts) is the total of all payments you received during an accounting period, before any deductions for returns, discounts, or expenses. Every dollar a customer pays you goes into that total. The shipping fee is part of it because the customer paid it to you.
What you do with the money afterward is a separate transaction. Charge a customer $10 for shipping, pay the carrier $7, and you have $10 in revenue and $7 in expenses. The $3 difference is profit. Even when you charge the customer exactly what the carrier charges you, the revenue and the expense are still recorded separately. They do not cancel out on the income line.
The logic holds whether you itemize shipping on the invoice or bake it into the product price. If you offer free shipping and sell the product for $58 flat, your gross sales are $58 and the carrier cost is still a deductible expense. The label on the invoice does not change the tax treatment of the money you collected.
How Shipping Appears on Form 1099-K
If you sell through a marketplace or take payments through a third-party processor, you will receive a Form 1099-K reporting the gross amount of payments processed on your behalf. That figure in Box 1a includes the shipping charges customers paid. It also includes refunds you later issued, platform fees deducted before payout, and any discounts applied. The number on the form will almost certainly be higher than the income you actually kept.
The IRS is explicit about this. The gross payment amount on Form 1099-K is not adjusted for fees, credits, refunds, shipping, cash equivalents, or discounts.1Internal Revenue Service. What to Do With Form 1099-K You are expected to reconcile the form to your own records. The shipping revenue is in the gross number and stays in your reported gross receipts; the shipping expense comes off separately as a deduction.
For 2026, third-party settlement organizations must file a 1099-K only when payments to a single seller exceed $20,000 and the total number of transactions exceeds 200.2Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill Both conditions must be met.3Office of the Law Revision Counsel. 26 U.S. Code 6050W – Returns Relating to Payments Made in Settlement of Payment Card and Third Party Network Transactions Shipping charges customers paid count toward that $20,000, so a business with heavy shipping volume can cross the reporting threshold faster than expected.
Deducting Shipping Costs on Schedule C
Sole proprietors report business income and expenses on Schedule C. Shipping fees customers paid you belong in gross receipts on the income side. On the expense side, outbound shipping costs paid to carriers can be deducted on Line 18 (postage) or Line 48 (other expenses), depending on how you categorize them.4Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) Inbound freight for inventory does not go on those lines; it feeds into the cost of goods sold calculation in Part III instead.5Internal Revenue Service. Publication 334, Tax Guide for Small Business
When a 1099-K arrives showing a gross figure that includes shipping, do not simply drop Box 1a onto your return as revenue and stop there. Report the gross amount, then take the shipping expense and other legitimate deductions on the expense lines. The net result is your actual taxable income. If you cannot document the carrier costs you are deducting, you lose the deduction, so keep the carrier receipts and platform reports that back up the numbers.
Freight-In vs. Freight-Out
Where the shipping expense lands on your return depends on which direction the package was moving.
Freight-in is what you paid to get inventory or raw materials to your warehouse or production facility. The IRS treats freight-in, express-in, and cartage-in on materials and merchandise as part of cost of goods sold.5Internal Revenue Service. Publication 334, Tax Guide for Small Business Those costs get capitalized into inventory value and flow into COGS when the product sells.
Freight-out is what you paid to ship finished products to your customers. This is typically recorded as an operating expense (often labeled Shipping Expense or Delivery Expense) rather than part of cost of goods sold. Keeping freight-out out of COGS matters if you want your gross profit line to reflect only the cost of acquiring or producing the goods. Bottom-line net income comes out the same either way.
Sales Tax on Shipping Is a Separate Question
Whether shipping is part of gross sales for income tax and whether shipping is subject to sales tax are different questions with different answers. The income answer is consistent nationwide: shipping is revenue. The sales tax answer depends on the state where your customer receives the package, and states have landed all over the map.
Some states tax shipping regardless of how it appears on the invoice. Others exempt separately stated shipping charges that reflect the actual carrier cost. A third group ties the shipping charge’s taxability to the underlying product. If you sell into multiple states, do not assume that your income-side treatment tells you anything about your sales-tax collection obligations. Those rules live in a different rulebook.
Penalties for Leaving Shipping Out of Income
Excluding shipping charges from gross receipts understates your income. If the understatement is large enough, the IRS imposes a 20% accuracy-related penalty on the underpaid tax. A substantial understatement means the amount you underreported exceeds the greater of 10% of the tax that should have appeared on your return or $5,000.6Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments For a business with meaningful shipping volume, treating shipping fees as non-income can cross that line quickly.
The safe path is straightforward. Report the full amount customers paid you, shipping included, as gross receipts. Deduct what you actually paid carriers on the correct expense line. Keep the records that let you reconcile the 1099-K to your books. The revenue and the expense are two separate entries, and both belong on the return.