This is the ultimate guide for Shopify business owners to prepare for tax season 2023.
In this guide, you will learn:
- An overview of Shopify sales tax
- The must-know deductions to maximize Shopify store profits
- The 5 Most Important eCommerce Tax Forms to Know
- How to Avoid Delays and Get Your Refund Faster
- Tips to prepare for tax season in 2023
Therefore, if you are one who wants to manage the Shopify business taxes effectively, this guide is a must-read for you.
CHAPTER 1:
An Overview Of Shopify Business Sales Tax
Making an online business out of selling things no longer gets you away from the tax authorities.
Not now, when e-commerce is worth trillions of dollars annually.
When it comes to taxes, eCommerce sellers used to be able to mostly operate beneath the radar. However, as the business evolved and the revenue surged, attention began to focus on it. The COVID-19 pandemic has only enhanced the popularity and reliance of this type of consumption, which now accounts for 63% of all buying encounters.
In this chapter, we will discuss all that you need to know about Shopify business taxes. Keep reading to grab the knowledge.
Introduction to Shopify Sales Tax
Before 2018, online retailers weren't overly concerned with sales tax.The legal precedent in the courts was not on the side of the governments and authorities, and the norms were ambiguous and not truly upheld. It wasn't a guarantee that businesses would win when states sued them for failing to collect sales taxes, that is, until Quill v. Wayfair.
Just three years ago, the roles were reversed in this significant case.
Eligibility thresholds were established after it was determined that e-commerce was a lucrative sector that shouldn't be exempt from the same sales tax regulations as actual businesses.
Ecommerce retailers would have to start collecting and remitting sales tax if they reached these revenue limits and were deemed to have economic nexus.
What is sales tax?
The US refers to its levy on items sold as sales tax.Your customer adds sales tax to their order; you must retain the tax and send it to the appropriate taxing body. Sales tax is commonly referred to as a "pass-through" tax because of this procedure.
It is comparable to VAT, with the exception that, unlike VAT, it is not imposed at each stage of the production process. But we’ll get to that later.
Who needs to pay the sales tax?
Online retailers who meet the requirements for economic nexus in a certain state are required to pay that state's sales tax.Annual revenue thresholds define the existence of an economic link. When a seller reaches that mark, they are regarded as being liable for tax.
Some US states have no taxation at all, while others have their own limits and rates. Some states demand that you pay their rate, while others want you to pay their buyers' home states' rate.
Does Shopify pay sales tax for you?
Shopify does not cover your sales tax costs.Laws governing marketplace facilitators were introduced to aid in automating the collection and remittance of sales tax for both authorities and merchants.
Marketplace intermediaries like Amazon and eBay must collect and send sales tax on behalf of their sellers who have economic nexus in the states that have enacted these laws.
But Shopify is not a middleman in the market.
Shopify won't take care of the remittance process for you, even though you can set up your store to collect sales tax.
How to set up taxes on Shopify?
Follow these steps to configure Shopify for sales tax collection:- You must specify which nations you will be collecting from. Go to Settings > Taxes in your Shopify account.
- Click Save after choosing the tax rate and location.
You have the option to display your product prices in your store with sales tax included, which is helpful.
CHAPTER 2:
The Most Important Deductions To Consider for Profit Maximization
There is a major misconception that:
Tax Deduction = Dollar Dollar Bills!
A tax deduction won’t abandon you, disappoint you, run away from you, cause you to cry, say goodbye, tell a lie, or cause you harm. Rick was the wisest.
The IRS is also well aware of the amount that is annually left unclaimed. Don’t be one of these people by learning to keep your hard-earned money in your bank account, where it belongs.
To help you take advantage of the IRS tax rules, we’ll use this opportunity to introduce the following crucial eCommerce deduction.
Shopify Sales Tax Deductions
- Advertising Expense
It's crucial to understand that your ads, whether they generate 0.5 ROAS or 3.0 ROAS, are BOTH tax deductible.
On your schedule C form, don't be hesitant to list every dollar you spent on advertising (more on that later).
An internet firm is expected to spend a lot of money on advertising. If you report too much information about your eCommerce marketing, you won't have problems with the IRS.
- Merchant Fee Expense
However, if you don't account for it, you may be missing a $60,000 tax benefit on a $2M corporation.
Ascertain that you can access the financial report site of your payment processor and obtain a reliable merchant report.
- Home Office Deduction
The good news is that all business owners are eligible for a home office deduction!
You must fulfill two prerequisites in order to be eligible for it:
- "Regular and exclusive use" means that the area in which you operate must be used solely for commercial purposes.
- It must be your company's main location.
- Simplified Method
The amount of your tax deduction is calculated by multiplying the square footage you inhabit by $5 per square foot.
The most you may spend on the basic option is $1500 and there is a cap of 300 square feet.
If you are a last-minute filer, we advise utilizing this approach because any deduction is preferable to none!
If at all possible, contrast it to the Actual Expense Method, which can result in a MUCH greater deduction amount.
- Actual Expense Method
Additionally, based on the proportion of your property that is utilized for business, indirect costs like mortgage interest, insurance, home utilities, real estate taxes, and ordinary home maintenance are also tax deductible.
- Startup Cost Deduction
So what can be deducted from initial costs? Startup Cost is divided into three categories:
- Traveling abroad to meet with suppliers, paying consultants, etc. are some examples of opening-day preparations.
- Making a Trade or Business—for example, conducting product research.
- Legal fees, accounting fees, state filing fees, incorporation fees, and insurance are some examples of organizational costs.
This is a special deduction that will offer you this year's startup of your firm an extra confidence boost.
- Bonus Depreciation
Typically, a straight-line approach is permitted, so if you have an asset worth $100,000 with a 10-year useful life, you can take $10,000 year.
Well, with bonus depreciation, you can depreciate an item more quickly in the year that you buy it.
Previously, you could claim 50% of the asset, but thanks to the Tax Cut and Jobs Act, you may now claim 100% of it!
That's accurate. The asset you bought this year can be written off in full.
The following assets are eligible for Bonus Depreciation:
- Equipment for furniture manufacturing
- Industrial equipment Computer software
- qualified motion pictures and television shows
There's more, though. The requirement for assets to qualify for bonus depreciation under the new laws has been removed. Buying used assets is an option.
Other fascinating trivia regarding Bonus Depreciation:
- No yearly cap on deductions
- It may exceed your yearly company income!
- The asset must be put into use that year.
CHAPTER 3:
What Are The Important Tax Forms For Shopify Businesses
Taxes and forms go hand in hand. The most crucial types of forms you must be aware of as an eCommerce business owner are:
- W9 Tax Form
- 1099-MISC Form
- Schedule C
- Form 1099-K
- Form 8824
Keep reading this chapter to know about these forms.
Types Of Tax Form For Shopify And Other Ecommerce Businesses
No matter at what scale you are running your business, you are liable to pay business taxes as per your state regulations. Here are the most crucial tax forms that you as an eCommerce business owner must be aware of:Make sure to have any contractors you want to recruit complete a W9 form in order to comply with IRS contractor standards if you plan to pay them more than $600 in annual income.
You must disclose the wage you paid each individual (over $600) in rent, services, and other income payments that are not made to W2 employees of your company on an annual basis (due in January of the following year).
For reporting business revenue and costs, sole proprietorships and LLCs should use this Profit or Loss From Business form. Knowing this form inside and out can help you maximize your tax savings by knowing exactly which deductions your company is eligible for.
- Form 1099-K
A crucial form is "Like-Kind Swap," which lists capital assets you exchange for another capital asset of a like kind without triggering a taxable event. To put it another way, it is a brilliant strategy to postpone taxes while selling your assets at the same time. Yes, you can even swap out one e-commerce company for another!
CHAPTER 4:
How to Avoid Delays and Get Your Refund Faster
It’s now officially tax season. Like last year, experts say challenges and delays may lengthen the time it takes to receive your federal tax refund.
The IRS advises filing your return early, doing so electronically, and selecting to have your refund deposited directly into your bank account to prevent a delayed refund. It’s crucial to double-check your work before filing, especially if you were entitled to the third stimulus check or advance payments for the Child Tax Credit last Spring.
Here are a few things to remember as tax season gets underway and some advice from professionals to help you get ready to file your return.
What To Know Before Filing Shopify Sales Taxes
An analyst for the Tax Foundation advises reviewing your records and estimating how much you have already paid before filing your tax return. This will make it easier to calculate how much money you owe the IRS or how much money you will get back in the form of a refund. You can take immediate action to remedy any issues if you are aware of how much tax you have previously paid.Prior to filing, you should make sure to obtain all required paperwork. If you're still waiting for your Form W-2 salary statements from your employer, which must be sent by January 31st, you might not be able to file them today. Listed below are a few typical tax records you may need:
- From your employer, a W-2
- Forms 1099 (such as 1099-MISC or 1099-INT) for many sources of income, including banks and retirement plans. Multiple 1099s could be issued to you, such as those for interest on savings accounts, gig worker income, or unemployment benefits.
- Statements of mortgage interest, Form 1098
- To reconcile advance payments for the Child Tax Credit with the balance you still owe, send Letter 6419.
- To reconcile stimulus payments made using the Recovery Rebate Credit, see Letter 6475.
- Information on any taxable bitcoin transactions, if you purchased cryptocurrency last year.
Expect Delays This Tax Season
Your tax refund this year might take longer than normal, just as in 2021.According to a senior fellow at the Urban-Brookings Tax Policy Center, the IRS has done a favor by telling people upfront about what the process is going to be like this year. However, no one would want their tax agency to be in that situation.
The causes of this year's delays, according to Holtzblatt, will be payments for the advance child tax credit, stimulus cheques, and other modifications to the tax rules brought on by the pandemic.
Utilizing direct deposit will help you receive your tax refund more quickly and with fewer problems than other methods of payment.
Nine out of ten taxpayers receive their direct deposit refunds within 21 days, according to the IRS. On your tax software, you can select direct deposit as your refund option before filing your return. Make sure to ask them to e-file your return if you engage with a tax expert to prepare your return. For the IRS to deposit your return promptly, you must submit your account and routing numbers.
Don't forget to check again for any mistakes. Your electronic return may be removed from the system, manually inspected, and you'll need to offer a correction if there is a mathematical error, missing information, or suspicion of identity theft or fraud. This process can delay refunds.
If there is a problem, visit the IRS website before contacting. Holtzblatt predicts a spike in call volume similar to last year, which means your chances of getting live assistance may be slim.
You can check the status of your refund using the IRS' Where's My Refund service 24 hours after filing electronically or four weeks after mailing your tax return.
Be Prepared To Reconcile Payments
Calculation errors, a frequent tax season issue that Watson predicts will be even more prevalent this year, will be a major possible cause of this year's tax delays. The majority of these mistakes, according to his forecast, will result from the third stimulus check and advance Child Tax Credit payments that millions of Americans will receive in 2021.Make sure you have Letter 6419 if you got advance Child Tax Credit payments; the IRS started distributing these letters in late December. It displays how much of your Child Tax Credit has already been paid to you in advance. This will be necessary in order to balance those payments with the remaining sum you will be entitled to when you file.
The IRS will deliver Letter 6475 to people who qualified for the third stimulus, often known as Economic Impact Payments, in late January. This letter can assist you in deciding whether you should apply for the Recovery Rebate Credit if you never got the third stimulus payment.
There may be more money available for some taxpayers than what they received during the third stimulus cycle. This is due to the fact that the checks' initial calculations were made using your most recent tax return, which might not accurately reflect your financial condition in 2021. You may be eligible for a greater payment, which you can claim when you file this year, depending on your financial situation.
You shouldn't be concerned about paying back more stimulus check money if you received more than you were entitled to, similar to the first two stimulus payments made last year.
Other Important Dates
Although delays may be unavoidable for many taxpayers this year, completing your taxes on time and correctly can help you avoid having to wait a long time for your refund or make changes to your return. Here are some other dates to note on your calendar as you get ready to submit your 2021 taxes:-
January 24 is the first day you may submit federal tax returns.
Employers must provide employees with benefits before January 31. submitting a W-2 form
April 18 is the deadline to submit your 2021 tax return, ask for an extension, and make any necessary payments.
Residents of Massachusetts and Maine have until
April 19 to submit their tax returns for 2021, ask for an extension, and make any necessary payments.
Oct. 17 is the deadline for filing if you ask for and receive an extension.
CHAPTER 5:
How To Prepare For The Tax Season In 2022
The deadline for submitting taxes for this year is April 18, 2023, but it’s wise to begin preparing for tax season as soon as possible.
Depending on where you live, you may need to submit a state tax return as well as a federal tax return if you had income in 2021. The list below might assist you in understanding how to get ready for tax season and put together everything you need to file on time if you are unsure of where to start.
Here are seven essential steps you can take to start getting ready for tax season.
Top 7 Tips To Prepare For Tax Season In 2023
- Understand your filing status
- Single
- Head of the family
- filing jointly if married
- filing separately after marriage
- widow/widower with a dependent child who qualifies
The IRS has a handy tool that can help you determine your best course of action if you're unsure of your filing status. Simply respond to a series of questions, and the filing status that best suits your circumstances will be displayed.
- Make sure to update your name and address
Contact the Social Security office in your area if you have legally changed your name. You'll need to present identification as proof of your identity, such as a passport, a life insurance policy, or a marriage license. Calling the IRS, mailing a change-of-address form, or including your new address on your return are all options for updating your address information. Just keep in mind that if you wait until you file your return to accomplish this, you can miss crucial IRS correspondence.
- Organize your tax documents
- A copy of last year's tax return
- W-2 forms
- 1099 forms
- Form 1098
- Form 1099-DIV
- Form 1098-E
- Form 5498
- Form 1095-A
- Letter 6419
- Information on business expenses
- Decide if you'll do your taxes yourself or hire a tax preparer
It could be advisable to have an experienced tax professional handle your return the more intricate your tax situation is. An accountant can assist in making sure all the information is accurate and submitted to the IRS in the right manner if you operate a business and must file both personal and business tax returns.
It might be simpler and less expensive to use tax filing software if your tax position is quite easy, such as if you're a single filer with W-2 employment who doesn't yet own a home or have dependents. Many of these tools are effective at assisting regular taxpayers with the process, and in some circumstances, you might be able to pay a little additional charge to have a tax preparer connected to the business examine your return before it is submitted.
- Don't Under-Contribute to Your IRA
The good news is that you still have time to make IRA contributions through April 15, 2022, if you haven't already upped or maxed out your contributions.
- Consider filing an extension
Consider asking for an automatic extension of six months to file your return in October if you want to give yourself some breathing room. You'll need to fill out IRS Form 4868 for this, or you may ask your tax preparer to handle it for you. Just bear in mind that even though it is free to ask for an extension, if you owe taxes, interest will still accrue and you can be charged related penalties. Even if you're very certain that you won't owe any money when you file your return, an extension can help you gather all the required paperwork, give yourself extra time to file, double-check everything, and avoid penalties for late filing.
- Adjust your withholding
If your tax position remained basically unchanged but you received a higher refund after submitting your return the previous year, you may be withholding too much money from your salary. In the meanwhile, it can be a sign that you're not withholding enough if you ended up owing taxes.
If you're unclear, you can estimate how much tax you should withhold using this IRS tool. In order to avoid encountering the same problem when you submit your 2022 return, you can perhaps think about speaking with your HR department to alter your withholding for the current tax year.
CHAPTER 6:
Final Key Takeaways
In this chapter, we will recall some of the important points associated with Shopify taxes and the preparation tips for the tax season.
Let’s Recall Some Important Points
The power of accurate bookkeeping for your Shopify taxes should now be clear to you, hopefully.We'd like to sum up this essay with three important considerations for your e-commerce business:
- Learn the most important tax advantages and deductions for your company so you don't hand over your hard-earned money to the government!
- Hire a CPA who is familiar with your industry and will be available to you 365 days a year to answer your queries because tax planning is a year-round activity!
- To propel your company to the next level, start early and educate yourself on all the business tactics and tax benefits you should be implementing!
- Also, follow the tax season planning tips to save yourself from the huge Shopify sales tax burden.
We are eager to watch every one of you go above and beyond with your brand and passion!
CHAPTER 7:
FAQs
Do you have any queries related to Shopify business tax season planning? This chapter is a must-read for you.
Here are some of the most frequently asked questions that we have answered.
Keep reading…
FAQs
What if I don’t collect sales tax on Shopify?
If the state pursues you because you failed to collect Shopify sales tax when required, you will be required to pay the sales tax out-of-pocket. Additionally, you can be charged some penalty fees. Let's explore how to set up taxes on Shopify with this in mind.Can I write off the Shopify fees?
You are given all the resources you need by Shopify to operate an online store. Therefore, Shopify fees are unquestionably an "ordinary and necessary" business expense for every e-commerce company.Does Shopify send a tax form?
When a store reaches 200 transactions and 20K in sales, Shopify will send 1099 to the store owner and the IRS. 1099s can be downloaded from the payments area. Then choose which documents to download after seeing payouts. Conclusion
Managing Shopify business tax and being prepared for the tax season can be a tedious task. With the expert team of Free Cash Flow by your side, you will no more have to worry about your Shopify sales tax.
We are a tax advisory company that has extensive knowledge of the Shopify business sector. With comprehensive tax planning, we assist both small businesses and large corporations in maximizing their tax savings. We also comprehend the SaaS industry and the difficulties Shopify businesses encounter.
Get in touch for assistance.
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