Congratulations, you’re about to launch your online store (or maybe you’ve already launched it)! Now that you’re selling, you’ll need to know the basics of online store accounting. This will make it easier to track your sales performance, prepare your taxes, and claim ecommerce deductions.
Here is a brief guide on how to track your sales and expenses for your online store.
Calculate Your Gross Sales and Net Sales Amounts
To calculate your gross sales and net sales amounts, log in to your ecommerce platform sales dashboard and export your sales data. Most ecommerce platforms provide a list of all of the sales that you made before any platform fees, chargebacks, or returns are calculated.
The total of these sales before any costs are deducted is the gross sales. Make a note of this amount. Then subtract the platform fees, chargebacks or returns in order to calculate your net sales.
Reconcile Your 1099-K
Once you have the gross and net sales amounts, you will use them to reconcile your form 1099-K.
Form 1099-K, Payment Card and Third Party Network Transactions is used to report transactions that are made via payment settlement entities. Not everyone who sells online will receive a Form 1099-K. Essentially, the form is not required to be issued unless:
- The ecommerce platform processed more than $20,000 worth of credit and debit card payments on your behalf, and
2. The service processed over 200 individual payments.
If your gross sales figures do not meet both of those requirements, you are not required to be issued a Form 1099-K. That said, some ecommerce platforms will issue a Form 1099-K even if this threshold has not been reached. Sometimes, online store platforms decide to issue the form even if you only made a single sale.
If you receive a 1099-K from an online store platform, you may notice that gross revenues are more than what was paid to you. That’s because the 1099-K does not take out fees and chargebacks. You’ll need to reconcile the 1099-K to what was paid to you in a separate document (we recommend doing this in Excel or Google Sheets) by exporting the data directly from the platform. This reconciliation is required when filing your taxes and for financial purposes.
If you do not provide the ecommerce platform with your appropriate tax information, the ecommerce platform may be required to withhold income taxes from your payments. We have seen as much as 20% of gross sales withheld by certain platforms. This withheld amount will also be reported on Form 1099-K, which you can get back when you file your taxes.
Use Separate Accounts
A rule of thumb when operating a business, especially an ecommerce business, is to make sure that you always use separate accounts for your business activities. Note that LLCs, partnerships, and corporations are legally required to maintain separate accounts for business. If you operate your business as a sole proprietorship, you are not legally required to have separate accounts. However, it’s highly recommended that you do have them as the IRS can qualify your business as a hobby and disallow all deductions.
Open a separate credit card and bank account for processing all of your operating expenses. You may also want to consider opening a business credit card so that you can start building business credit. A good business credit score gives you access to better terms. These terms include lower interest rates from lenders, net 30 payment terms with vendors, and more.
Centralize Your Vendor Expenses
The next step is to centralize your vendor expenses. This will make it easier for you to calculate your cost of goods sold for tax purposes. There are several software programs that let you scan receipts and invoices. These programs make it easier to keep track of all of your expenses in one place.
For inventory purchases and other expenses, make sure you have invoices that show the units purchased and item details. For accounting purposes, make sure that you are also able to quickly summarize the totals per month and quickly identify the vendor that you bought from.
Keep Track of Your Receipts
Finally, keep track of your receipts. The IRS generally doesn’t require that you maintain receipts for expenses under $75, with the exception of hotels and meals (where you need receipts for anything over $50). However, it is a good idea to keep all of your receipts and you’ll want to demonstrate that you have a system (for example, accounting software), to track and organize all your transactions.
When it comes to organizing your expenses, there are three types of receipts that you should pay extra attention to:
- Out of Town Business Travel: Make sure that you maintain receipts related to lodging, vehicle rentals, and flights to provide a paper trail that proves to the IRS that your business trip was not a personal holiday.
- Vehicle-Related Expenses: Keep a careful record of when, where, and why you used a vehicle for business. You should keep a log of your business miles if you plan to claim a mileage deduction.
- Utility and Home Office-related Receipts: If you plan to take the home office ecommerce deduction, you can also deduct a percentage of your home office-related expenses, such as your internet and cell phone bills.
Ask an Expert
If you have any doubts about sales and expense tracking for your online store, it might be worth talking to a taxpro, especially one who specializes in ecommerce. They can assist in creating a system that ensures you’re following all tax regulations and can claim the deductions you are entitled to.