Taxes 101 For E-commerce Business Owners

Sep 7, 2016 by Michelle Nickolaisen
Taxes 101 for ecommerce business owners
Posted Sep 7, 2016 by Michelle Nickolaisen

When you’re running a business, you have a million things on your mind at any given moment: sales, marketing, promotion, when you need to hire someone new… the list goes on.

Accounting is probably the last thing on your mind on a day-to-day basis — you ignore it until it’s the end of the quarter, and then it’s a mad dash to get all your ducks in a row before any filing deadlines.

But don’t worry: we’re here to help you break the cycle.

We’re going to cover everything you need to break your bad accounting habits, starting with…

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Accounting, Finance & Legal E-Commerce Blueprint

A pack of 22 educational resources answering the most common questions small business owners may have on legal, accounting and finance

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Accounting tools for e-commerce businesses

TaxJar

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Price: Starts at $19/month

Out of all the options on this list, TaxJar is the only one created specifically for e-commerce businesses, to help them track and file taxes without getting lost in spreadsheets. And, as a bonus, TaxJar also integrates directly with Ecwid to create automated sales tax reports and auto-file your sales taxes, so you’ll never miss a filing date again.

QuickBooks

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Price: Starts at $15/month for small business plans

QuickBooks has been the go-to accounting tool for a while now. The upside is that since it’s so common, every accountant or bookkeeper knows how to use it  so if/when you outsource some of these processes, you won’t have to search to find someone who uses your software.

The downside is that a lot of non-accountants find it difficult to use. And, as with most other items on the list, it’s not necessarily built for e-commerce — there are tools like invoicing that might or might not be useful to you, depending on how your business is structured (and how much wholesale business you do, etc.).

Xero

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Price: Starts at $9/month

Xero positions itself as an easier to use alternative to QuickBooks, and has many of the same features: invoicing, accountant access, payroll (with timesheets built in), W2 and 1099 prep, and filing sales taxes. There’s also a mobile app, and you can easily import your data from QuickBooks if you want to switch.

Wave

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Price: Free plans available, $19/month to track and pay staff, $19/month for on-call expert help, 2.9% + .30 per transaction for credit card processing.

Wave has similar features to Xero and Quickbooks, with the main difference being its pricing structure. Instead of having a monthly fee by default, Wave charges for credit card processing when payments are made through Wave invoices, and has add-on fees for payroll processing and premium phone/chat support.

Kashoo

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Price: $199.95 a year or $29.95/month

Kashoo is created for small business owners who do their own accounting and need a simple, fast way to view all their important numbers — from expenses to cashflow to tax reporting — in one spot. It also has integrations with payroll apps and accountant access, should you need it.

Accountant or DIY?

Once you’ve picked an app to use, the next question is: will you get some help, or DIY your accounting?

First off, let’s address a common source of confusion: what’s the difference between a bookkeeper and an accountant?

A bookkeeper works on a day-to-day level, doing things like recording financial transactions, creating and sending invoices, and completing payroll.

Meanwhile, accounting is more of a high-level process that takes the information put together during the process of bookkeeping and then analyzes that information. Typically, an accountant is the one who prepares the financial statement, analyzes costs of operations, and completes/files tax documentation.

For many business owners, bookkeeping can be DIY’d without taking too much time or energy using a tool like one of the above suggestions (Xero, QuickBooks, etc.). When it comes to filing taxes, however, you might want to get an accountant — depending on your previous experience with filing business taxes, an accountant can help you maximize your deductions and minimize your time spent stressing out over tax paperwork.

If you have multiple streams of income (i.e. you work a day job and your e-commerce business is a side hustle, or if you do an e-commerce business in addition to freelance work), or your business is an LLC or S-Corp, then an accountant is a good idea. And if you go the “file it yourself” route, make sure you don’t miss out on these commonly overlooked deductions.

State sales tax: What you need to know

Arguably the trickiest part of tracking sales tax is that you’ll need to collect taxes in every state that your business has “nexus” in. Nexus is created when you have even the slightest physical presence (typically, property, employees, business owners, or inventory) in a state.
If you use your own shopping cart (like Ecwid), and all of your inventory, owners, and employees are in the same state, then you only have nexus in one state.

If you use dropshipping services, where your products are stored in a third-party warehouse and shipped out when people order, then you could have nexus in more than one state — check with a tax professional or look on state government websites to find out.

If you are (or your inventory is) in one of the following states, then you won’t need to collect sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Everyone else needs to collect and file their sales tax. You should be collecting sales tax on sales from within your state (i.e., if you live in Texas, and someone in Texas orders a product, they pay the sales tax).

Past that, the rules as far as how much to collect in tax and how to file those taxes are going to vary from state to state, so you’ll need to check the state government website or talk to a local accountant to verify all the rules. Sales taxes are typically paid quarterly and you can pay fines or fees if you miss the file dates — I once paid $120 to file $40 worth of sales taxes. Not a mistake I made again!

How to file your taxes

How you actually file your state and local taxes will depend on your business structure. The rules and filing processes for LLCs or S-Corps are more complicated than if your business is set up as a sole proprietorship (which is how most e-commerce businesses start). If your business is an LLC or S-Corp, you’ll probably want to consult with an accountant to file your taxes. If you’re a sole proprietor, then you can probably file taxes on your own without too much hassle, as long as you keep good records.

Either way, as an e-commerce owner, you’ll need to file and pay your estimated taxes quarterly, and then review those payments annually and make any adjustments as needed (pay more or get a refund). This not only saves you time when it comes to annual tax filing, it can save money, too, as the IRS charges a fine for people who are self-employed but file yearly instead of quarterly. For more on estimating and filing quarterly taxes, head to this blog post.

Also, for the sake of clarity, it’s worth noting that state income tax (which is based on your business income) is not the same thing as state sales tax (which is a percentage of sales made to customers within your state). Both of these things need to be tracked separately and filed accordingly.

Whew! That’s a lot of information, but knowing all of that, you’ll be much better equipped to keep all your business numbers measured and your taxes filed from here on out.

Your first step: pick a software solution and set it up, today. (Won’t have time today? Pick a day in the next week and task it out in your project management tool of choice — or just set a reminder using your phone.)

Have a question? Let us know in the comments. Want to get more e-commerce advice? Make sure to subscribe to the blog!

About The Author
Michelle is a freelance writer living in Richmond, VA, with her Shiba Inu and cat named after the Hulk. When she's not writing about business, she can usually be found working on her novel series or other side projects, or training Brazilian jiu-jitsu.

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