How to Pay US$0 in Taxes for Shopify Store
The U.S. tax code was designed to primarily benefit private incorporated businesses. Employees and independent contractors pay higher taxes than businesses and have fewer possible tax deductions. Notably, employees and independent contractors who have invested in real estate, financial markets (e.g., stock market, crypto markets), government projects (e.g., city bonds, state bonds, treasury bills), and/or private business projects, can often reduce their tax burden by deducting their losses and reinvesting their gains. In short, if you are not an incorporated business or person who is actively investing in private and/or public projects, you are going to have a harder time paying US$0 taxes on your ecommerce business income.
Now, don’t rush to a lawyer, accountant, or private service provider just yet. When you incorporate your business, you’ll want to invest in a business entity that can retain its earnings. If the business never releases its earnings to the owner(s) or investor(s), then it is not taxed on that income. Income is only taxed when it is released by the company.
Pass-Through Business Entities
This means that sole proprietorships, partnerships, S corporations and limited liability companies are not the best business entities for a business owner who wants to pay zero taxes. Why? These are pass-through businesses. This means that the income earned by the business is declared on the business owners’ and investors’ tax returns. So, you are taxed on whatever income you receive from the company, and the company is not taxed at all.
In cases like this, the business owners should deduct as many business expenses as possible, write-off as much bad debt as they can, and do everything possible to reduce the money paid out to them by the business. Unfortunately, for you, unless you have lots of expenses, business losses, or investment losses, for you to pay US$0 in taxes requires that you receive, at least on paper, no financial benefit from operating your business. Most people don’t want to operate a business that generates so little income that they make no money from it.
Form a C Corporation or LLC with C Corporation Taxation
The alternative, create a C corporation or a limited liability company with C corporation taxation. These two types of companies can retain their earnings, pay their employees wages/salaries (which are deductible), and are eligible for tax deductions that are not available to private individuals or independent contractors. For example, there are a lot of tax deductions companies can claim for doing research and development, exploring new markets, and other business development-related activities. Thus, besides limiting your financial and legal liabilities, C corporations and LLCs (with C corporation taxation) can reduce your taxes to US$0.
C Corporation vs. LLC
If you are a startup, independent contractor, or sole proprietor, you are likely to be intimidated or overexcited about forming your own C corporation. Research the costs, administrative work, legal requirements, and legal consequences for not fulfilling all your corporate duties. For instance, C corporations must hold annual meetings, issue financial statements, and file more paperwork to establish themselves. If you have someone you can afford to pay to do this for you, it may be the right choice for you. On the other hand, if you must do all the research, paperwork, make phone calls, and handle the online stuff, plus run your business and have a life outside of work, a C corporation may not be your best option.
Instead, you can set up an LLC. LLCs have far fewer administrative, paperwork, and financial filing requirements than C corporations. Now, it is true that an LLC is a pass-through business, but you can form an LLC and elect to have corporation taxation for it. In this case, the LLC can retain its earnings. The result is that the LLC is not taxed on the retained income and the LLC’s owner and/or employees can still be paid for their services to the business (e.g., salaries, wages), but the amount of money paid out can be adjusted to limit the receiver’s tax burden.
LLC Pays You a Small Salary and No Taxes
For example, if you are working a low wage job and start a successful ecommerce shop, you can improve your quality of life by having the business provide the facilities and equipment you need to operate it as its only employee, and not take a salary. After all, if the business is paying for your accommodations, transportation, health insurance, etc., you can live reasonably well off of a small salary. There are people doing this, but you should seek professional guidance when setting this up. In the alternative, if you don’t need or want any income from your LLC, you can leave the company’s earnings in the company and pay no taxes on them.
Independent Contractors: The Self-Employed
You Bear the Full Tax Burden
Individuals who run ecommerce stores on the Shopify platform and who have not incorporated their businesses are treated like independent contractors. The Shopify platform does not pay their federal or state taxes. It also doesn’t pay their social security or medicare taxes. The platform only allows you access to a protected site where you can sell your goods and services. The owners/operators are responsible for paying all the taxes due on income received from operating the business.
Plus, since the USA has a pay as you go tax system, it wants its tax money when you collect revenue from a sale. You are expected to pay your taxes quarterly based on your anticipated income. If your taxes are underpaid, the IRS can demand the taxes you owe, charge you interest on the taxes owed, and assess a penalty against you (i.e., charge you more money) for not paying your taxes on time and in the right amount! This is the burden independent contractors must bear when running businesses on platforms like Shopify.
Ways to Reduce Your Business Taxes
If you are an independent contractor by choice, special circumstances, or it just happened to you, then no worries, you can still pay zero taxes on your business. How? First, you deduct as many expenses as you can that are associated with operating the business. Second, if you’re an employee and your ecommerce business is doing well, maximize your contributions to your retirement plan(s), invest your money, reinvest any market gains, invest in real estate (many ways to do it privately and as part of an investor group), or just start buying national, state, and city bonds. Bonds are conservative investments with low interest rates. So, you will most likely earn interest on your investment, your investment will be safe, but you won’t make tons of money from it. Finally, claim as many personal and business deductions as you can legitimately claim on your tax return.
Shopify Specific Tax Deductions
Whether you are an independent contractor or incorporated business, you can reduce your taxable income by deducting business expenses on your tax return. Besides the general deductions that can be used with ecommerce businesses and startups, there are some that are likely to specifically apply to Shopify businesses.
Any money paid to part- and full-time employees can be deducted from your gross income. If you do not pay your employees federal and state taxes, your employees are independent contractors who must pay those taxes when they file their taxes at the end of the tax year.
Any business related benefits that you provide your employees can be deducted from your revenue. For example, if your employees must work late, and you provide meals for them and transportation home, those costs are tax-deductible. They were incurred during the operation of your business, support your business operations, and enhance your enterprise’s profitability.
Shopify Platform Fees
Any fees paid to Shopify for access to the platform and special services provided by the platform are tax-deductible. These fees are a necessary business expense, because without access to the Shopify platform, you cannot run your business.
Inventory Spoilage and Loss Expense
If you work with perishable goods, you can deduct the cost of the goods that cannot be sold because they expired before you could sell them. Also, if there were problems with maintaining them (e.g., blackout lasted for hours and the food in the freezer spoiled), you can deduct the inventory loss.
Your goods must be shipped and arrive in mint condition when they reach your customer. For this to happen you must purchase packing material, labels, wrapping, tape, boxes, envelopes, postage, markers, blank invoice slips, staples, ribbons, rubber banks, etc. Everything purchased to pack your products is tax-deductible.
All shipping fees are tax-deductible. This includes payment to delivery drivers, special order processing, paying for people to help you get the items to the shipper, import/export taxes, etc.
Payment Processing Fees
As an ecommerce business owner, you are probably not collecting cash for all your sales. Your customers’ payments must be processed by third-party payment processors who charge you a percentage of the payment for processing the credit card, crypto payment, PayPal payment, wire transfer, etc. All of these fees add up. You can claim them as a business expense and use that expense to reduce your taxable income. Also, the fee that Shopify charges you for handling payments is also tax-deductible.
Business and Health Insurance
Insurance premiums paid for your business and health insurance are deductible. The business insurance protects you from the negative financial consequences of a workplace injury and unforeseen problems with the business. An unforeseen problem can be a customer who complains about your goods. To resolve the matter, you must reimburse the customer and lose money on the goods because you cannot resell them.
The money that you spend to get your business set up and running can be deducted up to a maximum of US$5,000. This deduction includes costs related to travel, home business office, utilities, office supplies, office equipment, computer equipment, and platform costs, payment processing costs, etc.
Depreciation of Assets: Bonus Depreciation
You can deduct the depreciation costs of your vehicle, office furniture, office equipment, and other assets over time. However, bonus depreciation allows you to deduct 100% of the depreciation cost of qualified assets in the first year of purchase. This can result in your business paying US$0 in taxes or even a net business loss. The net business loss can be carried over for several years, which will allow you to reduce your tax burden in other years. There are several forms of depreciation, so carefully consider where you want to claim bonus depreciation of any or all of your assets in their first year of purchase.
When you are establishing your brand, you may need to purchase supplies with your logo printed/engraved/stamped on them and add special touches to your orders, so that you stand out from your competition. Branding costs are tax-deductible.
Marketing and Advertising
Your marketing and advertising costs are deductible expenses. Whether you run digital, print, radio, and or TV ads, the cost of producing the ads and running them are deductible expenses. In addition, if you give away prizes in a contest or promotional gifts, they are also tax-deductible.
You may decide to pay a professional photographer to photograph your products. Attractive photos with products placed in suggestive contexts may generate sales, customer inquiries, and lead to multiple orders. The cost of the photos and use of the props in the photos are considered tax-deductible business expenses.
If you must pay to store your product, the storage costs are tax-deductible. If you’re using part of your home or storage facility/space to store your Shopify products, then you can only receive a partial deduction for the space used by your business’ goods. Any expenses associated with maintaining the storage area are allowable deductions.
Environmental Control Devices
Environmental control devices include refrigerators, heaters, cooling areas, humidity controls, etc., that you must purchase and pay to operate are also deductible expenses.
Any fees paid for professional services that are used to support your business operations are tax-deductible. Types of professional services that can be included in this deduction are legal, accounting, tax, consulting, photography, website development, and photography fees. Other professional services not listed are covered too. If in doubt about the validity of the service (e.g., therapy sessions, company retreats, business coaching), contact an accountant or tax adviser before claiming it as a deduction.
Home Business Office/Workspace
When you dedicate a specific area in your home, office, or even on your desk to your business, the dedicated space and the cost of maintaining it can be deducted as a business cost.
Whether you use your own personal vehicle for your business or one that was purchased specifically for the business, you can deduct mileage, fuel, maintenance, repair, parking, tolls, and other vehicle-related costs. You can also deduct the cost of your travel (e.g., flights, buses, trains), hotels, taxis, rental cars, meals, entertainment, travel insurance, etc. as a business expense.
Training and Education
While developing your store, customer base, marketing strategies, and advertising strategies, you may need or want to take special classes, be privately coached, or invest in self-study courses. Regardless of how you choose to educate and train yourself and/or your staff, the costs of doing these things are tax-deductible.
As a business owner/operator of a Shopify store, you can pay US$0 in taxes if you incorporate your business into an LLC with C corporation tax treatment, take all allowable tax deductions, and retain your earnings. If your tax deductions exceed your earnings, carry the business losses into the following years to reduce your tax burden.
In the alternative, if you choose to work as an independent contractor, you are advised to max out all allowable deductions, invest your income into financial markets, real estate, and public and private projects in order to reduce your taxable income. These things may be effective in substantially reducing your tax burden or bringing it down to US$0 or lower. However, if your business is successful and your revenue is growing, you will have to find other ways to reduce your tax burden outside of increasing your debts and locking up your business revenue in investments, especially if you need the income from your business to pay your living expenses or other bills (e.g., student loan payments, children’s private school tuition, family holidays).