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Filing Small Business Taxes for eCommerce

If you're running a small business, there are certain taxes that are required to be paid. These taxes depend on your company's legal structure and its revenue.

Some of the most common small business taxes include income tax, which covers social security and Medicare, sales tax, self-employment tax, property tax, and excise tax.

What Common Taxes Do Small Businesses Pay?

Small businesses face a number of tax burdens. Most commonly, they must pay income taxes based on their business profits and other income, payroll taxes if they employ people, self-employment taxes if they are freelancers or own a side hustle such as selling crafts online or driving for Uber or Lyft, and property taxes if they own any physical assets.

There are also state, city, and local sales taxes and excise taxes that may be applicable for certain types of business activities. Each type of tax has its own rate rates, rules, and obligations. Small business owners must consult with a tax professional and review all applicable laws to ensure they are paying all required taxes.

The most common business tax is federal income tax. It affects all types of businesses, though the amount that is owed can vary depending on how the company is structured. For example, a sole proprietor or independent contractor who files an information return pays a flat rate of 21% on their net earnings. A partnership, on the other hand, can expect to pay about 13.3% in taxes, while an S corporation pays around 23.6%.

Additionally, the business structure determines whether or not the company is eligible for tax breaks and credits. For instance, if the company is organized as an LLC or S corporation, it can take advantage of the qualified business income deduction (QBI).

Small businesses must pay payroll taxes for employees. These taxes are based on the employee’s wage and benefits, such as health insurance and vacation days. In addition, the company must pay Social Security and Medicare taxes for its owners. These taxes are paid on a quarterly basis and are typically filed with the state’s Department of Revenue.

In addition to payroll taxes, small businesses must pay state and city sales and excise taxes. For example, a food truck business in a city with a sales tax must pay a tax on all purchases made by customers.

Taking care of small business taxes is critical to avoid penalties and keep more of your hard-earned money in your pocket. The best way to approach tax season is to work with a small business accountant who can help you understand your tax code, file your taxes correctly, and make payments on time.

Payroll Tax

ECommerce businesses that have employees — and especially those that are rapidly growing — must pay attention to payroll taxes. These are the taxes that employers withhold from employee paychecks to send to the government, as well as FICA (Social Security and Medicare) contributions that the business makes on behalf of its employees. In addition, there might be local employment taxes, which vary by city or state.

Filing payroll taxes can be complicated because tax laws and rules differ by jurisdiction. There are also a lot of moving parts, like calculating and filing sales taxes, employment taxes, and property taxes. The best strategy is to hire a tax professional to make sure that you’re filing accurately and on time.

Most states require sales tax for eCommerce businesses that have nexus there. Nexus is determined by a combination of factors, including where you have a physical presence, where you sell inventory, or where you hire affiliates who refer customers. It can be easy to run afoul of these regulations, so it’s important to work with a tax professional when you first set up your online store.

Small business owners can also take a variety of deductions, depending on the type of business they have. For example, sole proprietorships can deduct up to $1,500 of expenses from their personal incomes, while S corporations and partnerships can claim the profits they report on Schedule C. Using an accounting software package that supports these types of deductions can make it easier to keep track of your expenses and income.

It’s also important for eCommerce businesses to file tax returns on time. The deadlines for filing business taxes vary by state, and they may be quarterly or annually. It’s important to set reminders for these dates, so you don’t miss a due date and incur a penalty. Getting help from a tax expert or relying on automated software can reduce the stress of managing your eCommerce business’s taxes. For example, a platform like Shopify Tax offers built-in automation for sales tax calculations and can provide nexus alerts.

Self Employment Tax

ECommerce businesses that operate as sole proprietorships, disregarded entities, or partnerships are liable for self-employment tax (SE). SE is a federal contribution to Social Security and Medicare that’s typically higher than what you’d see withheld from your W-2 paycheck. You pay this tax on your net business earnings. It’s important to report all of your business revenue accurately and consistently, as this will help you determine if you have taxable income or a deductible loss.

The IRS website has a helpful online calendar with all of the major tax dates for small businesses. If you miss a deadline, you’ll need to submit a form to request an extension.

Filing taxes for your eCommerce business requires careful planning and consistent recordkeeping. You must choose the best business structure, report your revenues and expenses accurately and consistently, and claim your deductions wisely. It’s also a good idea to seek the help of a professional.

Sales taxes are imposed by state and local governments on the sale of goods and services. These taxes are collected by the business and remitted to the government. In some states, you may also be required to collect and remit sales taxes if your eCommerce company has a physical presence in the state or jurisdiction, hires employees there, or exceeds a certain threshold in sales or revenue.

You’ll need to calculate your total sales and use taxes for the year based on the value of your goods and services sold, your inventory, and other factors. These taxes vary by state and by industry. You can find more information about sales and use taxes in your state’s website.

Home office deductions are a common small business tax deduction for entrepreneurs. The IRS publishes Publication 587, which details the home office deduction. For example, you can deduct $5 per square foot of your home used for business up to 300 square feet.

Employer of record or EOR services can be invaluable tools for eCommerce companies that need help managing employee payroll and filing taxes. These services can help you navigate local tax laws and regulations, ensure compliance with employee income tax withholding and other payroll deductions, and manage global workforces across time zones.

Property Tax

As a business owner, you likely understand the importance of staying up-to-date with local and state laws on taxes, especially sales tax. However, this is one aspect of running an eCommerce business that can be difficult to keep up with, especially as your company grows.

Sales tax is a percentage of the sale price that you charge your customers, and it works in a similar way to the taxes charged at brick-and-mortar stores. In the United States, there are more than 12,000 different sales tax jurisdictions. Each state’s rules and regulations vary, and some may require you to register your business and remit sales tax in multiple states.

New York was among the first states to implement sales tax laws requiring online retailers to collect and remit sales tax, and it’s not messing around. It recently issued a ruling that requires all sellers, including those who operate exclusively online, to remit sales tax to the state. These laws are based on the “economic nexus” principle, which is determined by whether the seller has a physical presence in the state (like a warehouse or fulfillment center) or meets certain thresholds for sales volume and other criteria.

ECommerce companies typically use a software program to handle most of their sales tax calculations and filings. This helps them comply with complex regulations, and it can save them time and money in the long run. However, it’s important to stay up-to-date on the latest laws and requirements, particularly as they pertain to the economic nexus standards in individual states.

In addition to collecting and remitting sales tax, your small business must also file annual property taxes on the tangible personal property that it owns, such as equipment and vehicles. These taxes help pay for local schools, roads, and other infrastructure.

The property tax due date depends on the type of entity you have, so it’s important to know your specific deadlines. For example, sole proprietorships and disregarded entities report this revenue on Schedule C, while partnerships and S corporations use Form 1065 or 1120S. If you’re unsure of your deadlines, check with the county where you operate to find out more.

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