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How To File Taxes For Shopify Store?

How To File Taxes For Shopify Store?

Managing your online Shopify store is a complex task. While Shopify enables you to have a customized online storefront, getting sales on your Shopify store is a lot of work on your end.

Getting traffic, building trust, and generating content that leads to sales can leave you all consumed. Add to this Shopify tax calculation and filing.

It is a common practice for Shopify store owners to leave their Shopify taxes for the last moment leading to non-compliance, fines, and penalties. Inaccurate tax calculations, incomplete or incorrect tax forms, missing out on tax laws, and delays in tax filing result in IRS and state sales tax agencies coming for you.

That is why, you as a Shopify store owner need to know how Shopify taxes work, what are the various types of taxes you need to pay as a Shopify store owner, what tax forms you need to submit, which states are you in nexus with, and how to do your books so that you can comply with tax laws.

In this article, we will let you know in detail how to file taxes for your Shopify store.

Shopify Taxes Shopify Store Owners Need To Pay

You as a Shopify store owner will be required to pay:

1. Federal Income Tax And Self-Employment Tax

This is the amount of tax that is paid on the income earned from your online Shopify store. Since the IRS will consider you as a self-employed individual, you will have to pay both federal income tax and self-employment tax to the IRS.

2. Shopify Sales Tax

Sales tax is a consumption-based tax that is charged by retailers on the goods sold to customers or end-users. You as a retailer will at least be obligated to pay sales tax in the state where you put up and have a place of business as a retail seller. This is because you are in a physical nexus with your state. Likewise, you will pay tax on goods sold to customers in states where you have triggered a nexus.

3. Shopify International Tax

This is the tax charged on goods sold to customers outside the US. For instance, if you are a US-based retailer selling goods to customers in the European Union, you are obligated to charge Value Added Tax (VAT) from EU customers and remit the same to the appropriate tax authorities.

Read:

Likewise, suppose you are a US-based retailer selling goods internally via your online Shopify store to customers in countries like Australia and Canada. In that case, you are obligated to charge Goods and Services Tax (GST) on goods sold to customers in these countries and remit the same to the appropriate tax agencies.

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Shopify Income Tax: Forms, How To File, And Due Dates

Since you are a self-employed individual in the eyes of the IRS, you would be liable to pay two types of income taxes: federal income tax and self-employment tax.

What Is Federal Income Tax?

This is a tax that the US taxpayer pays on the income received by him in the form of money, goods, services, and property that is subject to tax together with income received by him from outside the US. As a Shopify store owner, you are liable to pay federal income tax on the income you earn by selling goods and services from your online Shopify store. The IRS lays down the marginal tax rates that are charged on your taxable income. Taxable income is the net income you earn after deducting business expenses. Further, you use your taxable income to figure out the marginal tax rate applicable based on the tax bracket in which you fall.

Want to know how to calculate federal income tax on your taxable income?

Read: 1099 Tax Brackets To Know Self-Employment Tax

What Is The Federal Income Tax Rate?

In the US, we follow the progressive tax system in which income is taxed at different rates. In other words, tax is charged only on the portion of income falling into a particular tax bracket. As mentioned above, you need to calculate your taxable income to know the amount of federal income tax payable for the year.

The marginal tax rates laid down by the IRS for 2023 for individual single taxpayers are as follows:

S.No.  For Incomes Greater Than Federal Income Tax Rate
$11,000 12%
$44,725 22%
$95,375 24%
$182,100 32%
$231,250 35%
$578,25 37%

You can refer to our article on ‘1099 Tax Brackets To Know Self-Employment Tax’ mentioned above to learn how to calculate federal income tax using these marginal tax rates.

What Is Self-Employment Tax?

Since you work for yourself and not anyone as a Shopify store owner, you are a self-employed individual in the eyes of the IRS. Self-employment (SE) tax, also called the Self Employment Contributions Act (SECA) tax, is a tax that is a self-employed individual’s coverage under the Social Security System. It is a Social Security and Medicare Tax that a self-employed individual pays to the IRS to avail of the benefits under the Social Security system.

This is unlike a wage earner, whose employer withholds taxes from his/her wages to fund the wage earner’s Social Security and Medicare Programs. Since you are working for yourself as a Shopify store owner, you are responsible for contributing your share of Social Security and Medicare Taxes by paying the self-employment tax.

What Is Self-Employment Tax Rate?

Unlike the federal income tax rates, the self-employment tax is a fixed rate of 15.3% which is bifurcated as follows:

  • 12.4% for the Social Security Tax (6.2% for the employer’s share and 6.2% for the employee’s share)
  • 2.9% for the Medicare Tax (1.45% for the employer’s share and 1.45% for the employee’s share)

Want to know how self-employment tax is calculated for your Shopify store?

Read: A Guide To Paying Self-Employment Tax

Who Must Pay Self-Employment Tax?

You as a Shopify owner are liable to pay Self-employment tax and file a 1040 SE tax form if any of the following applies to you:

  • Your net earnings from self-employment (excluding the church employee income) are $400 or more.
  • Your income as a church employee is $108.28 or more.

How To File Shopify Income Tax And Self-Employment Tax?

Since you work for yourself as a self-employed individual who runs a Shopify store, it is your responsibility to pay both federal income tax and self-employment tax.

Let’s take an example to understand how you can file federal income tax and self-employment tax as a Shopify store owner. Follow the below-mentioned steps to file your federal income tax and self-employment tax.

1. Determine Federal Income Tax Payable

To calculate federal income tax payable, you as a Shopify store owner will have to first determine your Taxable Income.

What Is Taxable Income?

Taxable income, also called Net Income, is the income that remains after deducting all the expenses that are incurred to operate the business. Please note that to find out the marginal rate applicable for calculating the federal income tax payable on the income generated from your self-employment, you first need to calculate Taxable Income.

How To Calculate Taxable Income?

Taxable income is calculated as follows:

a. Determine the Gross Income

This is calculated by deducting expenses incurred in conducting business from gross receipts from your Shopify store. Form 1040 Schedule C is used to calculate Gross Income or Net Earnings from your business.

b. Determine Adjusted Gross Income

This is calculated by subtracting ‘above-the-line’ deductions such as deductible part of self-employment tax, etc from Gross Income. Form 1040 Schedule I is used to calculate Adjusted Gross Income.

c. Calculate Taxable Income

This is calculated by subtracting below-the-line, also called standard deductions from the Adjusted Gross Income.

Once you have calculated the taxable income, use this to locate the tax bracket you fall into in the marginal tax rates table provided by the IRS, as mentioned above. Since a progressive tax system is followed in the US, federal income tax is calculated progressively.

2. Determine Self-Employment Tax Payable

The next step in filing Shopify income tax is determining the amount of self-employment tax payable. The self-employment tax payable is calculated as follows:

i. Calculate Net Earnings Subject to SE Tax

Net earnings subject to SE tax are calculated using the Net Earnings as worked out in form 1040 Schedule C. 92.35% of the Net Earnings as calculated in 1040 Schedule C are the Net Earnings subject to SE Tax. Say your Net earnings as in 1040 Schedule C are $216567.40. Accordingly, your Net Earnings Subject to SE Tax will be 92.35% x $216567.40 = $200,000.

ii. Determine Net Earnings Subject To Social Security Part of SE Tax

The IRS has kept a cap on the maximum net earnings subject to the social security portion of the SE Tax. According to the IRS, only the first $160,200 of the Net Earnings Subject to SE tax are prone to the social security portion of the SE Tax. Accordingly, your Net Earnings Subject to SE tax are $200,000 (which is more than $160,200), and you will charge 12.4% (6.2% for the employee share and 6.2% for the employer’s share) only on the first $160,200 (12.4% x 160,200) and not $200,000.

iii. Determine Net Earnings Subject To The Medicare Part of SE Tax

The medicare part of the SE tax is calculated as follows:

  • 1.45% on the first $200,000 of the employee wages plus
  • 1.45% medicare tax + 0.9% additional medicare tax on all employee wages over $200,000

Since Net Earnings subject to SE tax ($200,00) do not exceed $200,000 in our case, the additional 0.9% medicare tax will not apply.

iv. Calculate The SE Tax Payable

Now calculate the SE tax payable by adding the social security portion of the SE tax and the medicare portion of the SE tax, as determined in the above two steps.

3. Pay Federal Income Tax And Self-Employment Taxes By Filing Returns

Once you have determined the federal income tax and self-employment tax payable, the next step is to file your Shopify income tax return. Here is the list of forms that you will have to fill out to file your federal income tax and self-employment tax returns.

S.No.  Form  Purpose  Due Date
1040 This form is used to calculate annual taxable income and the annual federal income tax payable 15th day of the fourth month after the end of the tax year
1040 Schedule C Used to calculate net income from your business which is also reported on the form 1040 and 1040 Schedule SE.  15th day of the fourth month after the end of the tax year
1040 SE This is used to calculate the SE tax payable and is filed along with Form 1040.  15th day of the fourth month after the end of the tax year
1040-ES Federal income tax is a pay-as-you-go tax. Self-employed individuals pay income tax via the Estimated Tax method using the form 1040-ES. Estimated tax is paid quarterly. The year is divided into four payment periods, each period having a particular due date. These include April 15th, June 15th, September 15th, and January 15th of the following year. 

Shopify Sales Tax: Charging Sales Tax In Shopify And How To File

In addition to the federal income tax and self-employment tax, the shopify store owners are also required to calculate, report, pay, and file sales tax. Unlike federal income tax and self-employment taxes, sales tax is a state-level tax with each state having its own sales tax regulations.

This is where filing sales tax can be challenging and complex as Shopify store owners need to keep track of sales tax rules, rates, and the updated laws of the states where they are obligated to collect and remit taxes to the appropriate state sales tax agencies.

The following are the steps that a Shopify store owner needs to follow to file a sales tax return.

1. Determine The Sales tax Liability

The first step in filing a sales tax return is determining whether you as a Shopify owner are liable to collect sales tax on your Shopify Sales. You as a Shopify seller will be liable to collect and pay sales tax to the appropriate state sales tax agencies if you have a nexus with those states.

What Is Nexus?

Nexus is the relationship of a business with a state’s tax agency. Each state has its own sales tax and nexus laws which makes determining sales tax liability complex and challenging. This is where you as a Shopify store owner need to keep track of sales tax rates, rules, and laws of the states with which you have a nexus. There are two types of nexus that you can have with a state:

a. Physical Nexus

You are in a physical nexus with a state if you maintain a place of business in that state. Accordingly, the state you are based in and are currently doing business from is the state you have a physical nexus with. This obligates you to register with your state’s sales tax agency, collect sales tax on your Shopify sales, and remit the same to the state. Each state has its definition of physical nexus. Some states have a broader definition of physical nexus and consider a Shopify store owner to be doing business from the state if he has representatives selling goods in that state on his behalf or solicits business via advertising through newspapers, catalogs, etc.

b. Economic Nexus

As a Shopify store owner, you are in an economic nexus with a state if you have sold several items or amount of goods that exceed the threshold set by a state. Each state has defined its thresholds for economic nexus. For instance, if your sales as a remote retailer exceed $100,00o in the current calendar year in Colorado, the economic nexus gets triggered. Accordingly, you are obligated to charge sales tax from customers on goods sold and remit the same to the Colorado Department of Revenue.

2. Register With Appropriate State Sales Tax Agencies

Once you have established a nexus with the states, the next step is to register with the appropriate state sales tax agencies. Each state has its own sales tax agency and a process for sales tax registration. Likewise, there are different types of sales tax licenses that you must obtain to undertake sales and charge sales tax on goods sold across various states. For instance, to obtain a standard retail sales tax license, you can either apply online using MyBizColorado, Colorado Department of Revenue’s online portal for sales tax registration, or use Form CR0100 Sales Tax application form for sales tax registration.

3. Obtain The Sales tax ID

After the successful sales tax registration, the appropriate state sales tax agency will issue a sales tax identification number. This sales tax ID will allow you to charge sales tax on goods sold to customers in the registered state.

4. Set Up Shopify For Sales Taxes

Once you have the sales tax IDs of the states where you are obligated to collect sales tax, you can set up your shopify store for taxes. You can define regions where you will be selling goods, fill in the sales tax IDs so obtained from the state sales tax agencies, and define shipping zones in Shopify. This will allow Shopify to charge accurate sales tax rates on your Shopify orders and generate sales tax reports that will help you file your sales tax returns accurately and efficiently.

Want to know how you can set up your Shopify Store for Sales Tax?

Read: How To Set Up Taxes On Shopify?

5. Charge Sales Tax From Customers

Once you set up your Shopify store for taxes, the next step is to charge sales tax on your Shopify sales. Shopify will suggest you the sales tax rates, based on the locations you define, the number of goods sold, and the amount of sales undertaken in those regions. Shopify will suggest you the sales tax rates and charge the default rates in regions where you trigger Nexus. It also enables you to override sales tax rates in locations where default rates, as suggested by Shopify, do not apply.

Want to know how you can charge sales tax in Shopify?

Read: How To Charge Sales Tax In Shopify?

6. File Sales Tax Return

Finally, you as a Shopify store owner are required to remit the collected sales tax and file sales tax return with the appropriate state sales tax agencies. Since each state has its process of filing sales tax returns, you must check with the state sales tax agency to know the filing frequency, the due dates, and how to file returns with that state.

For instance, if you are a retailer in Colorado, you must file a sales tax return even if you have undertaken no sales during a calendar year. Also, sales tax return is filed monthly, quarterly, and annually. Further, there are two ways in which you can file sales tax returns. These include online and offline modes.

Online methods include filing returns via online portals such as Revenue Online, Sales and Use Tax System, XML filing, and Spreadsheet filing. On the other hand, an offline method includes filling out DR-0100 and sending the same on the Colorado Department of Revenue Address.

Want to know how you can file sales tax returns across every state in the US?

Read: How To File Sales Tax Return In The US For Your Online Store?

Want Help With E-Commerce Taxes And Accounting?

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How To File Taxes For Shopify Store? In this article, you will learn: Shopify Taxes Shopify Store Owners Need To Pay Shopify Income Tax: Forms,

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