While modern technology has enabled a rise in self-employed business owners, the pandemic’s impact on e-commerce growth has led to an all-time high of online micro-businesses and sellers. Everything from selling on Amazon and Etsy, or reselling on eBay, StubHub, and Poshmark, has helped entrepreneurs open profitable businesses or side hustles.
Just because your small business does not have a physical storefront, does not mean you can skip the tax responsibilities for selling online. Starting an e-commerce business is a big leap, but here’s how to make sure you are up and running correctly.
Knowing the differences between what the IRS classifies as a hobby or a business is important since, if a business, you can claim deductions for your expenses. Factors the IRS looks at include:
A full chart is available on our website, AlloySilverstein.com. Answering yes to these questions will likely deem your activity as a business. If operating full-time, consider applying for an EIN.
If you are used to being an employee who receives a Form W-2 each year, this step is trickier. You now receive 1099s and must manually put aside a percentage of your business income for taxes. Income taxes are paid at the federal and state level and they will expect quarterly estimates in April, June, September, and January. Self-employment taxes account for Social Security and Medicare.
Beginning in 2023, the new threshold for payment vendors, such as Paypal and Venmo, to distribute a Form 1099-K to taxpayers is $600 in digital transactions.
Since 2018, economic nexus has enabled states to tax businesses with a physical or virtual connection to a state. Requirements vary from state to state, so this will depend on where you are selling, where your inventory is located, and where the buyer is located. Only five states do not impose any sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Fortunately, accounting software and sales tax apps can help simplify the tracking of your sales tax requirements. You still must know which states you are conducting business in and what their sales tax rate is. Most states require businesses to register ahead of time for a permit. Do not forget to then remit any sales tax collected to the proper state tax authorities.
Hold on to your receipts as the following business expenses could potentially be deductible and help offset your income:
No matter how small or big your online business is, there is a responsibility to file federal and local taxes on earned income. Implementing these tips throughout the year will help make for a smooth tax season.
If you are ready to go full steam ahead with your e-commerce business, it is wise to invest the time in the beginning to set up the structure of your business for success. Your software eco-system or “tech stack” can help you stay sane and organized for tax season. Here are four areas to streamline, alongside some app and software recommendations from our accountants and advisors.
1) Accounting software that allows collaboration, real-time updates, and typically integrates with other apps and software.
2) An app to serve as your back-office file room to help you stay organized with filing expenses and paying bills.
3) A Point-of-Sale (POS) platform to be a storefront, manage inventory, and accept sales and payments from customers. For optimal efficiency, your POS should integrate with your accounting software.
4) Monitoring online sales tax for 50 states gets complicated quickly. These options help manage compliance.
Manager & Director of Cloud Services
Chris provides accounting, tax planning, and consulting services to professional athletes, family entertainment centers, and other businesses in the amusement and hospitality industry. He also aids clients in implementing cloud accounting solutions.
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