Managing taxes for online entrepreneurs can be a challenge because their e-commerce tax considerations can be very different from the considerations of a traditional business.
Certain tax considerations can have a big impact on your business’s success, which is why it is so important that you get it right. If e-commerce business owners plan carefully though, they can maximize their profits and avoid overpaying.
Check out the 3 eCommerce tax considerations for online entrepreneurs below and learn how to save money by filing your taxes correctly.
Top eCommerce Tax Considerations
1. Sales Tax
As you begin to form a plan for your business’s taxes, the first step should focus on your company’s approach to sales tax. Sales tax varies from state to state, so online e-commerce business owners need to know where they are required to pay sales tax.
In order to figure this out, they must establish Nexus.
Nexus refers to the connection between the taxing jurisdiction (the state) and the entity (the e-commerce business). Once this connection is established, the state begins to tax the business, and the e-commerce business leaders start to make a plan for their taxes.
However, establishing Nexus can be a complicated process due to a variety of factors. First, each state has a different definition of Nexus, so e-commerce business owners must familiarize themselves with the sales tax rules and regulations for each individual state. Use this resource as a state-by-state guide to economic nexus rules.
Each state’s definition of Nexus changes frequently, which means online entrepreneurs must continuously review the changes occurring within each state and see how it affects the state’s sales tax.
Whether or not you are required to pay sales tax also comes down to the number of units sold or how much revenue you generated in that state. Again, each state has different requirements.
Thankfully, there are tools that make managing your sales tax a little easier.
TaxJar and Avalara are sales tax programs that help you stay on track. These programs will assist you with:
- Sales tax calculations
- Sales tax reporting and filing
- Nexus tracking
- And more.
2. Income Tax
Income tax can also be tricky. Like sales tax, the way income tax is applied varies from state to state. However, as an online seller, you are only required to report income tax in the state where business is conducted, meaning you don’t have to file in every state where you’ve made a sale.
Here is an example for a little more clarity:
Let’s say you live in Illinois and sell products in states across the country but all of your business activities are conducted in Illinois.
In this case, you only have to pay income tax in Illinois.
Now let’s say you live in Illinois and sell products in states across the country but you have inventory facilities in Indiana and Ohio that also produce and/or distribute products. Since you are conducting business in Illinois, Indiana, and Ohio you are required to file an income tax return in all three states.
Again, whether or not you are required to pay income tax in a particular state is determined by materiality. Materiality is essentially a measurement of whether or not your liabilities are enough for you to need to pay income tax.
3. Payroll Tax
Many eCommerce businesses have employees working in different states from where business is conducted which creates questions surrounding payroll taxes. However, like sales tax, nexus also applies to payroll withholdings.
You’ll need to know which states you have nexus in and the requirements for making this establishment varies by state.
Any of the following could mean your business has nexus in a state:
- You own or lease property in the state
- You derive income from within the state
- You have capital or property in the state
- You employ personnel in the state for more than just solicitation
Once you’ve established nexus with a state, you are required to follow that states’ payroll withholding rules.
For employees, this is not ideal because most states require you pay income tax on money made for residents and non residents, meaning they are taxed twice, once by the state they work in and once by the state they live in. To combat this, employees can request reciprocity.
Reciprocity is an agreement between states that lets residents of one state request exemption from tax withholding in another state.
For you, as the employer, understanding nexus and reciprocity will give you an idea of if you should or should not withhold taxes from your employees.
Connect with an Expert for More eCommerce Tax Considerations
Managing taxes for your eCommerce business can be tricky and the need to understand and follow different rules for different states complicates them further.
However, getting these and other tax considerations right is essential because mistakes can be costly.
Along with tools like TaxJar and Avalara, we suggest working with an expert in eCommerce tax management, like Pasquesi Partners.
We’ll make sure you’re compliant with tax laws and only paying what you have to. Contact us today to learn more!