The pandemic has undoubtedly encouraged people to try their hand at an e-commerce business. There are a million different ways to make money online, but the most important thing after making sales is understanding how to plan for the tax consequences.
Today, we will talk about small business tax planning and map out some fundamental planning strategies and knowledge you should have before the end-of-the-year tax season.
If you’re new to running your own business, especially an e-commerce business, you will need to understand the rules surrounding finance and tax and how to plan as a small business owner.
Continue reading below as we dive deeper into the rules around finance and tax.
Differences between E-Commerce and Traditional Business
Since you are potentially making sales throughout the United States, unlike a traditional business, you will have to understand if and how much sales tax to charge.
The Supreme Court decided in 2018 that e-commerce businesses should not have unfair tax advantages and made it vital that you understand the economic nexus laws surrounding each state.
The primary tax that e-commerce businesses should worry about is sales tax. In 45 states (including Puerto Rico, Washington D.C., and parts of Alaska), you must charge sales tax. On top of that, counties may impose additional taxes within each state that make up the “combined” tax for that online transaction.
6 Steps to eCommerce Sales Tax Compliance
You need to be aware of six tax steps for your online business.
- Determine where you have sales tax nexus. (see more detail below)
- Determine if you need to pay tax on your products.
- Make sure to register for a sales tax permit.
- Create sales tax collection on your online shopping cart.
- Report and remit your sales tax to the appropriate state.
- File your sales tax returns.
If you understand and follow these, you will avoid mishaps at the year’s end.
Determine Your Sales Tax Nexus
One of the most important things to realize is that just because you physically aren’t located in one state doesn’t mean you don’t have to charge taxes in another. Having sales tax nexus defines the level of connection between your business and the state you are doing business in.
If you are an online retailer and you have nexus in a particular state, then you are considered by that state as a business that must charge sales tax to the buyers in that state and remit them to the state tax authority.
Every state in the United States is different, and the rules for determining nexus are constantly changing. Because of this, as an e-commerce business owner, you continuously need to be looking for any changes that occur within each state.
You only have to charge sales tax in the states in which it has been determined that you have sales tax nexus.
Create a Limited Liability Corporation (LLC)
Creating a Limited Liability Corporation (LLC) has many benefits when running your e-commerce business. As an online business owner, you are a sole proprietor, so you must report your income and expenses on your tax return.
Another benefit of setting up an LLC is setting up a separate bank account and credit card to keep your expenses separate from your account.
This will help again with keeping business expenses separate from personal ones.
Related Links: 9 Common Tax Mistakes For Freelancers and Side Hustlers
Know The Facts Around State Tax Laws
As an e-commerce business, you are responsible for collecting and paying taxes in different states, thanks to the supreme court case South Dakota vs. Wayfair Inc. In 2018 this law allowed states to charge sales tax to businesses located out of state.
Therefore, as an e-commerce retailer, you are responsible for having the proper software that calculates the tax you should be charging for each state.
Find A Good Bookkeeping Software
Choosing reliable accounting software is vital when organizing and recording all income and expenses.
Several accounting software on the market works well for e-commerce businesses, including QuickBooks Online, Wave, and Xero.
QuickBooks is the standard for most businesses because they make it simple to connect your business bank account and credit card account directly into the software.
Every time you buy something using your business card, it syncs automatically with your software.
Related Links: How To Easily Pull Top Reports In QuickBooks
Know Your Tax Deductions
Knowing your online tax deductions is a huge part of reducing the amount of taxes you pay each year. Remember that you pay taxes on the profit your business makes. Therefore, recording your expenses is vital to reducing the income you must pay taxes on at the end of the year.
Having an e-commerce business is different than a traditional business, but several tax deductions overlap at the same time.
Set Up Quarterly Taxes
You will now have self-employment taxes if you are set up as a sole proprietor. If you were once a W-2 employee, your employee paid half of your taxes, and you spent the other half.
As a sole proprietor, you are responsible for all of it. Instead of being hit with a big tax bill at the end of the year, set up a quarterly tax schedule so you can spread it out throughout the year.
Related Links: The Best Business Structure For Online Retail
Conclusion
Small business tax planning for eCommerce businesses doesn’t have to be complicated. As mentioned in this article, there are tools that can help with bookkeeping and managing your online business as you move along throughout the year.
At the end of the year, the goal is not to owe any taxes. So, educate yourself or hire a good bookkeeper to help you stay on track. For a consultation, reach out to Tax Hack to help determine the right path for you and your business.