Yes, gross sales include shipping charges. Every dollar a customer pays you goes into gross sales, and that includes the delivery fee on the invoice. If you sell a $50 item and charge $8 to ship it, your gross sales figure is $58. The $8 you later hand to the carrier is a separate business expense, not a subtraction from revenue.
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 the period, before any deductions for returns, discounts, or expenses. The customer paid you for shipping, so it belongs in that total alongside the product price.
The logic follows the money. You collected it, so it’s revenue. What you do with it next is a separate transaction. Charge a customer $10 for shipping, pay the carrier $7, and you have $10 of revenue and $7 of expense. The $3 difference is profit. Even when you charge exactly what the carrier charged you, revenue and expense are recorded on separate lines.
A narrow exception exists under U.S. accounting standards for sellers acting purely as an agent for the carrier. To qualify, you’d have to charge the customer the exact carrier cost, never take economic control of the shipping service, and pass the payment straight through. Almost no e-commerce business operates this way. The moment you set your own shipping prices, offer flat-rate shipping, or bundle delivery into the product price, you’re the principal and the full amount is revenue.
Shipping on Form 1099-K
If you sell through a marketplace or accept payments through a third-party processor, the Form 1099-K you receive reports the gross amount of payments processed on your behalf. Box 1a includes the shipping charges your customers paid. It also includes refunds you later issued, fees the platform deducted, and any discounts. The number on the form is almost always higher than your actual net revenue.
The IRS is direct about this: the gross payment figure 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 reconcile with your own records. The shipping fees your customers paid stay in the gross figure; the shipping costs you paid to carriers come out on the expense side of your return.
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 The $20,000 figure includes shipping charges, so heavy shipping volume can push you across the threshold sooner than the product-price math alone would suggest. Both conditions have to be met before a 1099-K is required.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
Deducting the Shipping Costs You Paid
Including shipping in gross sales does not mean you pay tax on the carrier’s cut. The money you paid to ship goods comes back out as a business expense. Where it lands on your return depends on which direction the package was going.
Freight-Out: Shipping to Customers
The cost of shipping finished products to customers is an operating expense. Sole proprietors deduct it on Schedule C. Postage falls on Line 18, and other outbound shipping costs can go on Line 48 as other expenses, depending on how you categorize them.4Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) Keeping freight-out separate from cost of goods sold means your gross profit line reflects only what it cost to acquire or make the product, and your operating expenses show the true cost of getting it out the door.
Freight-In: Shipping Inventory to You
Inbound freight is different. The cost of getting inventory or raw materials to your warehouse gets capitalized into inventory and then flows into cost of goods sold when the product sells. 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 For Schedule C filers, that means it belongs in Part III, not on the operating expense lines.
Free Shipping
When you offer free shipping, there’s no separate shipping line on the invoice, so the full product price is your gross sales figure. You still paid the carrier, and that carrier cost is still a deductible business expense. Under U.S. accounting standards, if the customer takes control of the product before shipment (common in e-commerce where title passes at the shipping point), you can elect to treat shipping as a fulfillment cost rather than a separate service and accrue the shipping expense when the sale is recognized.6Financial Accounting Standards Board. Accounting Standards Update 2016-10, Revenue From Contracts With Customers (Topic 606) Most small businesses already do this instinctively by booking the carrier payment as an expense in the same period as the sale.
What Happens If You Leave Shipping Out
Excluding shipping charges from gross receipts understates your income. If the understatement is large enough, the IRS applies a 20% accuracy-related penalty to the underpaid tax. A substantial understatement means the amount you underreported exceeds the greater of 10% of the tax that should have been shown on the return or $5,000.7Office 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 charges as non-income can cross that threshold in a hurry.
The reconciliation risk on 1099-K filers is the same in reverse. If you can’t document the carrier costs you’re deducting to bring the Box 1a figure down to actual net income, you lose the deduction. Good records of what customers paid for shipping and what you paid the carrier are what make the math defensible.
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 two different questions with two different answers. The income answer is consistent nationwide: shipping is revenue. The sales tax answer depends on the state where the customer receives the package, and states vary widely, with some taxing shipping in every case, some exempting it when it’s separately stated and reflects actual carrier cost, and some tying its taxability to whether the underlying product is taxable.
One wrinkle carries back to gross sales even when a state doesn’t tax shipping. Economic nexus thresholds in most states are measured against gross sales or gross revenue, and many states do not strip out nontaxable amounts when calculating whether you’ve crossed the line. Shipping revenue can push you over a state’s nexus threshold even in a state that would not have taxed those shipping charges. If you’re tracking sales volume against state thresholds, count the shipping.