Every filing period online sellers have to spend a significant amount of time with Shopify sales tax compliance.
Fortunately, Shopify offers several tools that can make your Shopify tax preparation a bit easier.
Here is a quick overview of Shopify sales tax and how to use Shopify to estimate what you might own in income and self-employment taxes.
How to Set Up Sales Tax for Shopify Sellers
In order to collect sales tax from buyers in your state, you’ll need to file for a sales tax permit. Once you have done this and you have been assigned a sales tax ID, you’ll be ready to set up sales tax in Shopify.
Shopify offers automatic tax settings to help you set up default sales tax rates. Make sure to set up your sales tax rates before you even make your first sale.
Here are the steps to follow:
- From your Shopify admin, go to Settings > Taxes.
- Then in the Tax rates section, click on United States.
- If you want Shopify to calculate the taxes for you automatically, check the Calculate taxes automatically option in the Calculating taxes section.
- Next add the regions for which you have nexus (such as a warehouse, office, or other facility) in the County, municipal, and state taxes section.
Adding Manual Tax Rates
- To set up manual tax rates, uncheck the Calculate taxes automatically option in the Calculating taxes section.
- In the Base taxes section, you can then manually set the taxes for each state and region in which you have nexus.
- Make sure to click Save to save your settings.
Lastly, before you finalize the settings, make sure that you check that the rate is accurate for your jurisdiction. Although Shopify regularly updates these rates, you may need to override them in certain situations.
Tracking What You Owe in Income Taxes in Shopify
You can use the sales reports that are provided in your Shopify analytics panel to determine how much you will owe in income taxes on your sales. Use the reported figures on your gross sales, refunds, and net sales to calculate your gross and net income.
From your Shopify earnings, you will need to set aside the amount you will owe each quarter so that you can make estimated quarterly income tax payments. You are required to pay estimated taxes if you will owe at least $1,000 in tax after subtracting your withholding or any refundable credits.
You can estimate the amount that you will owe in quarterly taxes by using Form 1040-ES. Quarterly tax due dates are generally the 15th of the month in April, June, September for this year and January of the following year. However, if the due date falls on a weekend or holiday, the due date will be shifted to the next business day.
If you’re operating as a business in your state, you’ll also need to file Schedule C. That means you will also be responsible for paying self-employment taxes, including Social Security and Medicare taxes.
These figures are based on your business income for that period and you can calculate the amount that you will owe in self-employment taxes by using Form 941.