Everything You Need to Know About Shopify Taxes

Shopify is an excellent platform for eCommerce beginners. It has tons of built-in features that make it easy to get started and succeed. As your business grows, the revenues from your Shopify store will start to add up. However, you should know a few things about Shopify taxes before you start spending your hard-earned money.

Shopify Taxes: Getting Started

Unfortunately, taxes are an inevitable part of running your own eCommerce store. The IRS classifies your Shopify earnings as self-employed income, and you need to cover the associated taxes. Since you don’t have an employer managing payroll taxes, you have much more tax responsibilities than a typical employee. 

Shopify taxes might seem overwhelming at first, but we’ve got you covered. This complete guide breaks down basic tax information for Shopify sellers.

Sales Tax

Sales tax is a tax levied by your state and local jurisdictions. Each state, city, and locality has the ability to levy their own sales tax. For example in the state of California the base sales tax rate is 7.25%. However, Los Angeles has a higher sales tax rate of 9.5%. The additional taxes usually go toward local public services and other projects favored by the local government.

As a shop owner, you are responsible for collecting sales tax from your customers. You’re responsible for applying the appropriate amount of sales tax to each sale and remitting it to the proper authorities. 

Since sales tax varies from state to state and city to city, it is important to determine where you have nexus. Nexus is determined as a physical presence. For example, if you are based in California and you also have merchandise a fulfillment center in Texas, you have a nexus in TX too. In this scenario, you might have to collect sales tax for the state of TX. 

Sales tax policies vary significantly by region, so you might need outside help. Talking to an accountant who specializes in state and local taxes (SALT) will ensure you’re complying with local laws.

Additional Income Taxes

The money you earn from your Shopify store is taxable income, so your new side hustle could have an impact on your tax bracket and tax rate. Consider these factors before your business starts booming, otherwise, you could be in store for a surprise tax bill at the end of the year. 

Self-Employment Taxes

Your online income could also incur a 15.3% self-employment tax. This tax includes the employee and employer portions of Social Security Tax and Medicare Tax. These taxes are typically collected as withholdings from your paycheck, but online sellers don’t get traditional paychecks. As a self-employed earner, you’re effectively the employer and the employee, so you have to cover payroll taxes from both the employer and employee side. Fortunately, half of the tax typically qualifies as a tax deduction, but it’s not a dollar-for-dollar credit. Ultimately, self-employment tax can become an enormous expense if you start to generated significant income from your store. 

You can employ certain tax strategies to minimize your self-employment tax costs, such as forming an S-Corp or taking an S-Corp election.

Answer these Questions Before You Set Up Shopify Sales Tax

You have to choose the right settings in Shopify to ensure you satisfy your sales tax obligations. Before you rush into it, ask yourself these questions to ensure Shopify correctly calculates sales taxes. 

Is Your State an Origin-Based State or a Destination-Based State?

Origin-based states require you to collect sales tax at the rate where the sale originated, i.e. wherever your business operates from. On the other hand, destination-based states tax sales based on the customers’ addresses. Most states are destination-based states, but California, Arizona, and New Mexico have origin-based tax policies. 

The next thing you need to consider is where you have nexus.

Do you have a nexus in more than one state?

Nexus is considered a physical presence. This could be your home location, the location of an employee, or even a warehouse where your merchandise is being stored. If you have nexus in more than one location, you will need to research the tax laws in each location, as you could be liable to pay sales tax in both locations. 

Does your state charge sales tax on shipping?

Just like sales tax, each state treats sales tax on shipping differently. This can really complicate your sales tax and land you in some hot water if it isn’t calculated properly. However, you don’t have to worry about it If you live in a state that doesn’t charge sales tax, such as Alaska, Delaware, Montana, New Hampshire, and Oregon. 

Unfortunately, most other states calculate sales taxes based on the total dollar value of each sale, including shipping charges. A handful of states calculate taxes on shipping separately, and some, like California, Illinois, and Minnesota,  have sales tax exemptions for shipping charges. 

Look up sales tax on shipping regulations in your state and any state where you have nexus so you have a full understanding of the appropriate procedures. 

Check local regulations for business exceptions.

Many municipalities regulate business activity in their jurisdiction, and you might have to take some extra steps to accommodate these policies before you launch your Shopify store. For example, some areas require businesses to have licenses permitting their business activity. You may also need a seller’s permit so you can collect sales tax. 

Requirements and fees vary from state to state and city to city, so you’ll have to check with local tax authorities for more information on regulations in your town.  

Quarterly Tax Payments for Shopify Vendors

Most self-employed workers and small business owners must make estimated tax payments every quarter. These regularly scheduled payments are often called quarterly taxes. 

Quarterly tax payments go towards your annual tax bill, and they’re intended to replace the tax withholdings a typical W2 employer would take from your paycheck. 

No one is withholding taxes from your income, but you still owe the IRS. Uncle Sam doesn’t like waiting too long for his cut, so U.S. businesses must make down payments on their tax bill every quarter. 

Quarterly tax deadlines typical fall on the following dates: 

estimated tax inforgraphic

Be aware, the dates change if the 15th falls on a weekend or holiday. In that case, the deadline extends to the following business day.

Does My Business Have to Make Estimated Tax Payments?

You must make quarterly estimated tax payments if you expect to owe more than $1,000 in taxes at the end of the year. Most Shopify stores meet this threshold, but newly launched stores might squeeze under the wire at first. 

How to Calculate Estimated Tax Payments

The easiest way to calculate your estimated tax payment is to use the taxes you paid last year as a reference. As long as your quarterly payments cover at least 90% of last year’s tax bill, the IRS will not penalize you for underpayment.

To calculate your payments using this method, start with last year’s federal tax bill. Take your final annual tax total and divide it by four. Pay this amount every quarter to avoid running into problems with the IRS. 

You can adjust your payments if you wish, but make sure you at least cover the 90% threshold. 

How to Pay Shopify Taxes

The IRS accepts estimate tax payments via mail, phone, and online. 

Paying directly through IRS.gov is the easiest and most convenient option, so you should use this method if possible. However, you might have to pay an additional service fee if you use a credit or debit card, so paying via an ACH transfer might save you a couple of bucks.  

W2 Wage Earners

Are you holding down a job while you run your Shopify store? If so, you might be able to avoid the estimated tax hassle.  If you work as a W2 employee, you can opt to increase the amount your employer withholds from your check. You won’t have to make quarterly payments if the withholdings cover your Shopify store’s tax obligations.

You can accomplish this by requesting to change your W4 Form, also known as the Employee’s Withholding Certificate. The number of exemptions you claim on this form will directly affect the amount your employer withholds. If you expect to owe estimated taxes for your Shopify income, request additional withholdings or claim fewer exemptions on Form W4 to cover the balance. 

How much should I save for Shopify taxes?

Setting aside a percentage of your revenue in a tax savings account is the best way to pay your taxes. Many businesses choose to set aside about 30% to cover tax expenses. This might be slightly more than you actually need once you factor in deductions and credits, but it’s better to have too much than too little. If you still have money left over after you pay your tax bill, look at it as a tax refund. 

Falling short on your tax bill creates a whole mess of additional problems, and no one likes dealing with the IRS. Whatever you choose to save, make sure it’s enough to cover your taxes.

Other Tax Considerations

Every business should take advantage of tax deductions to lower their tax expenses. Deductions compensate for costs associated with operating your business by lowering your total taxable income. Lower taxable income means a lower year-end tax bill, so make sure you claim every deduction that’s available. 

Some common deductions for Shopify sellers include:

  • Marketing/advertising
  • Contract labor (i.e. virtual assistant, copywriter, web designer, etc.) 
  • Shopify fees
  • Web hosting
  • Payment processing fees
  • Office supplies
  • Internet costs
  • Computer software and applications

It’s in your best interest to maximize your deductions, so keep track of every business expense. You don’t want to leave money on the table. 

Tax Hack: The eCommerce Tax Pros

Tax Hack accounting pros specialize in tax strategies for Shopify store owners and other eCommerce operators. If you’re starting to make money online, you need a tax advisor who understands your business model. Our tax pros utilize sophisticated strategies & techniques to minimize your tax bill to the fullest extent possible. Get started now with a one on one strategy session, and see how much you can save with Tax Hack.

About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Tax Hack Accounting Group. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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