We all know that paying taxes is part of the reality of doing business. It isn’t a fun task, especially if you’re in ecommerce and selling across multiple states and channels. There are many business-jeopardizing pitfalls in the swamp of over 12,000 tax codes in the United States.
Here’s what you need to know about income and sales taxes to save money and avoid any nasty surprises when tax time rolls around.
Federal and State Income Tax Overview:
Businesses have to pay federal income tax every quarter based on when they generated the income. We’ve listed the due dates for each quarter below:
|Federal Income Tax Generation Period||Tax Payment Due|
|Jan. 1 – April 1||April 15|
|April 1 – May 31||June 15|
|June 1 – Aug. 31||Sept. 15|
|Aug. 31 – Jan. 1||Jan. 15|
Source: Internal Revenue Service
If you run a small business or just sell extra things lying around the house, you can earn up to $400 in profits before paying income tax. The IRS considers the first $400 in profits as hobby income .
Tax rates and forms vary depending on your business structure. Some states have no state income tax, but if your state does, keep in mind that state and local taxes can be offset by itemizing deductions on your returns.
With last December’s Tax Cuts and Jobs Act, we now have a flat 21% tax rate for corporate profits, but 75% of businesses in the U.S. don’t fall into this category. These small and medium-sized businesses are considered pass-through entities, whose owners pay personal income tax rates with a 20% deduction on qualified business income . The new law caps this income at $157,500 (or $315,000 if you’re married and file with your spouse). Check out these 12 ecommerce tax deductions you don’t want to overlook.
Ecommerce Sales Tax Overview
If you’re an online retailer that sells over multiple channels, sales taxes can quickly turn into a nightmare. It gets even more difficult for those retailers selling products or storing physical inventory across multiple states because of the tricky subject of nexus . Nexus is basically some factor that connects the seller to a particular state. After the Quill Corp. v. North Dakota case, states can’t collect tax from sellers they have no nexus with. When they do have this nexus, rates vary, and sometimes depend on the county, city, or district.
It’s your responsibility as a business owner to collect taxes from buyers and file them with the right people. You’ll have to register for a permit for each state you have a this nexus with. You can do this by sending in your business info and Federal Employer ID, if you have one.
How you actually charge tax from customers depends on your ecommerce platform. Many online marketplaces and shopping cart softwares automate sales tax calculations, while giving you the ability to adjust the calculation based on your specific tax obligations. Be sure to keep track of the different due dates for filing and remitting to avoid compliance issues and maybe even receive discounts for early remissions.
Sales Tax Sourcing: Origin vs. Destination
States have the ability to apply sales tax based on origin or destination, with most states preferring destination. This means that some states can charge sales tax based on where your business is located, while others have the ability to charge sales tax based on where the product is shipped to. To make things tougher, different states have different rules when it comes to out-of-state selling. This fragmented system of mixed taxation can easily lead the best of us to confusion.
Here are some basic points to keep in mind:
- In-state sales should be taxed if your state has a sales tax. The final rate depends on any local taxes;
- If you and the buyer are both in destination-based tax states, the tax rate goes with the buyer’s shipping address;
- When you’re selling from a destination-based tax state into an origin-based state, no sales tax is charged unless you have a nexus in their state;
- If you sell from an origin-based state, the customer pays the rate in your state, even if their state taxes by destination.
Dropshipping and Third-Party Fulfillment Taxes
If you dropship or use a third-party service like Fulfillment by Amazon (FBA) , your sales tax permit can also double as a resale certificate in most states. Presenting this certificate when you buy the product lets you avoid paying sales tax on goods that you plan to resell. Also, be aware of your inventory and the shipping origin of your products. If they’re stocked in a different state, there’s a good chance that you have a tax nexus in that state and may have to charge sales tax. Amazon has made life easier for its sellers by collecting sales tax directly, and other online marketplaces may follow their lead.
2018: The Year of the Tax Cut
The Trump administration is declaring open season on taxes to boost job growth, so expect the horse trading in Congress to ring in more tax reform for 2018. We could very well see a cascade effect in states that sets local governments in a race to the bottom of the tax ladder, competing to attract top companies and entrepreneurs. Also keep in mind that changes made now will only impact the next tax cycle in 2019, but staying up-to-date will let you stay ahead of the competition and away from trouble with Uncle Sam and the states where you do business.
Interested in more accounting tips? Check out these 6 common ecommerce accounting mistakes you should avoid.