The Ultimate Guide : IRS Guidelines For Shopify Business Taxes
Introduction To Shopify Business Sales Taxes
As marketplaces become more international and orders are crossing the borders, sellers are now responsible for paying not only their own local tax authority but potentially all of their customers as well.
Learning what to expect in this day and age can be somehow overwhelming at first. But one as a Shopify store owner has to give a start in this area. This article is a part of our series on Shopify accounting. The primary taxes that Shopify sellers must be aware of, along with information on who they apply to, how much they will cost you, and how to collect them, are covered in this article.
Should you require additional information, we'll also provide links to publications that go into greater detail about each topic.
Explore this guide on Shopify taxes in detail:
What Is Shopify Business Sales Taxes?
For the sale of specific products and services, Shopify sales tax is a small portion of each transaction that is paid to the relevant regulatory agency. Despite the complexity and frequent changing of tax rules and regulations, Shopify may be configured to automatically handle the majority of sales tax calculations.
However, you must be aware that Shopify does not submit or file the sales tax on your behalf. To manage your sales tax, you might need to register your firm with your local or federal tax authority. When it comes time to file and pay your taxes, having ideal information in place will help.
Keep in mind that you don't actually own any of the sales tax you collect. The seller normally collects Shopify sales tax from customers and then sends the money to the appropriate state. Unfortunately, paying taxes is a necessary component of operating your own Shopify business. Your Shopify revenues are considered self-employment income by the IRS, and you must pay the corresponding taxes.
Since you don't have an employer managing payroll taxes, you are responsible for a lot more taxes than the average worker. Shopify taxes may initially appear complicated, but we've got you covered. For Shopify sellers, this comprehensive tutorial breaks down fundamental tax facts.
Who Needs To Pay For Shopify Sales Taxes?
Online retailers who meet the requirements for economic nexus in a certain state are required to pay that state's sales tax. 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 collect Sales Tax For You?
As Shopify is not a marketplace facilitator, it does not collect sales tax for you.
Marketplace facilitator laws were made for the collection or remittance process of sales tax for sellers and tax authorities. In those states which have adopted these laws, marketplace facilitators like Amazon and eBay are required to collect and remit tax on the behalf of sellers who have nexus to that specific state. However, Shopify is not a marketplace facilitator so it won’t manage the process for you.
Managing Shopify Taxes - Must-know Deductions
Advertising Expense:Advertising expense refers to the cost that incurs in promoting a business. Almost any business-related advertising is considered to be a deductible business operating expense.
Merchant Fee:This is a common e-commerce expense that is neglected. IRS recognizes the merchant fees as an essential operating cost and that means, a business can claim this expense as a tax-deductible expense.
Office Expenses:If you conduct your business out of your house, you are eligible for a deduction. How much of your home is used for commercial purposes will determine how much of this deduction you can take.
The IRS is known for closely examining home office expenses. Make sure you have the data you require to support your assertion. Take images of your workspace and keep a record of your daily agenda for it. Keep them organized with your tax documents and receipts for each fiscal year.
Vehicle expenses and business travel:As an entrepreneur, you can choose from a variety of business expenses if you use your vehicle to transfer packages, meet with clients, or conduct any other business operations. You may write off the full cost of operating your vehicle if it is used just for business.
What About Additional Costs?
There can be additional expenses you can deduct from your taxes, depending on the type of your business. If a business expense is "ordinary and essential," according to the IRS, it is tax deductible. It is a cost that you would typically pay when conducting business and is essential to the operation of your company.
Keep the receipts for all business-related purchases and keep them safe whenever in doubt. In this way, you may validate what is and isn't a tax deduction with your CPA before you file your return.
With tax deductions, you could be tempted to go inventive. Instead, concentrate on strategic tax planning to improve cash flow control. Always seek advice from your CPA or tax advisor before deducting any costs from your income.
IRS Guidelines For Shopify Sales Taxes
Do Shopify Sellers file taxes with the IRS?
Yes, Shopify submits a form called the 1099-K to the IRS each year detailing the majority of account holders' business activities. You'll get a corresponding 1099-K as a vendor from Shopify. You can use it to assist you in calculating your yearly gross income, which you'll need when you submit your taxes. Shopify does not, however, send the IRS a report on every transaction made by a merchant.
Let's discuss who receives a 1099-K for their Shopify income and who does not.
Who receives a 1099-K from Shopify?
A 1099-K will be issued to every company that made at least $600 through Shopify Payments during the calendar year. You will receive a different 1099-K for each internet store you own if they each generate at least $600 in revenue.
When you file your taxes, you must complete three basic forms:
- Schedule C, which is where you list your gross business revenues and outlays
- Calculating your self-employment taxes on Schedule SE
- Fill out Form 1040 to report your taxable income and compute your taxes.
To fill up the Schedule C, you’ll need some information:
- "Cost of goods sold" for you (COGS)
- Your additional business costs
- Gross income is the sum of all of your year earnings.
- Taxable earnings: subtracting your business expenses from your gross income
How To Handle Your “Cost Of Goods Sale”?
For Shopify businesses out there, the main expenses probably come from “Cost of goods sold”. It refers to what you spend directly on making or buying of goods your business sells. It includes:
Labor:Paying the people who assemble the product for you.
Materials:It includes the cost of parts or the items.
Operations:It is cost directly related to production or wholesale.
For bigger shopify stores, COGS goes hand in hand. This complicated accounting area involves what you have on hand, what you haven’t sold.
How To End Up Your Shopify Taxes?
Find out how to do your self-employment taxes in full in our guide! The idea of filing 1099 taxes may make you feel overwhelmed if you're starting a new business on Shopify. Be encouraged—the learning curve for Shopify taxes may be somewhat steep initially.
But if you break things down, it becomes easier. Consider hiring Keeper Tax to handle the procedure if you decide you'd rather spend more time expanding your business and less time battling the IRS.