There’s no question that e-commerce is revolutionizing the finance industry, but as with any period of change, it comes with some serious confusion. There is obviously little room for error when it comes to finances during tax season.
Filing taxes can be stressful — but for e-commerce entrepreneurs, doing so can become absolutely chaotic. As tax laws struggle to keep pace with the current realities of the marketplace, business owners are left wondering if they need to worry about facing an audit. Here are three of the top considerations for e-commerce businesses during tax season:
The Question of Sales Tax
Should your online store be charging sales tax? If you live in the U.S., know that 45 states and the District of Columbia demand that e-commerce businesses collect a sales tax with each transaction. So, unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, you may need to do so.
However, there is an important caveat: you only have to collect a sales tax if your business has a presence in the state. This is known as “sales tax nexus.” How do you determine if you have sales tax nexus? Answer the following questions:
- Is your office located in the state in question?
- Do you store inventory or have any warehouses within the state?
- Do any of your employees or affiliates work in the area?
- Did you do business temporarily in the state at any point during the year?
If you answered “yes” to any of these questions, you should register for a sales tax permit and begin collecting on each transaction. If you are unsure if you have nexus, contact a financial advisor or consult your state’s tax laws for small businesses.
An Employee or a Contractor?
There are clear benefits to hiring contractors rather than employees. It gives e-commerce entrepreneurs the flexibility to hire individuals to assist with specific projects without creating a long-term obligation in terms of employment. It is also substantially more affordable to hire a contractor since it lets employers avoid costly taxes and benefit costs associated with hiring a full-time worker.
It helps that there has been a generational shift towards freelancing, with many people choosing to work as freelance contractors as gigs in addition to full-time work. The gig economy has resulted in the widespread availability of people with a diverse range of specialties and pricing.
However, the distinction between an “employee” and a “contractor” is not arbitrary, and the IRS does not take the differences between these designations lightly. Misclassifying an employee as a contractor in an attempt to avoid paying employment taxes can lead to costly ramifications, including an IRS audit.
Don’t risk your business when it comes to tax time in an attempt to save a few bucks. Instead, be thorough with your tax deductions.
Essential eCommerce Tax Deductions
During tax season, one of the most important steps to remaining financially solvent and achieving growth as an e-commerce business is properly claiming all tax deductions you qualify for. There are many e-commerce tax deductions that entrepreneurs often forget to include, When filing, don’t forget to write off these business expenses:
- Independent Contractor Costs: First, as noted above, the costs of hiring independent contractors can be written off if they contribute to your business. For instance, if you obtain a professional brewing license and sell homemade alcoholic beverages online, you may want to hire an independent contractor to design a custom-printed beer label. The cost of that service, in many cases, would be tax deductible.
- Home Office Tax Deductions: Do you do most of your work at home? Is your office at home used exclusively for business purposes? If so, you can claim the square footage of your home that you use for work. Furthermore, utilities and home repairs can be deducted, as long as they are necessary for your business to thrive.
- Other Workspace Deductions: If, instead of working at home, you conduct business in a coworking space, where you pay for your share of supplies/utilities, those costs may be eligible as a tax write-off.
- Shipment and Packaging: The expenses associated with packing and shipping goods — including packing material, envelopes, printer ink, pens/markers, and postage costs — can be claimed when tax season rolls around. For e-commerce businesses that frequently send shipments to contractors and customers, this deduction can be a lifesaver.
- Insurance Costs: While insurance is necessary to keep your business (and, if applicable, your employees) secure, it can get costly. Fortunately, liability, workers’ compensation, business and property insurance can be written off.
- Interest on Business Credit Cards or Loans: Any interest that you pay throughout the year on business accounts is tax deductible.
- Certified Public Accountant Fees: If you ultimately decide to work with a consultant when filing taxes, keep in mind that the cost of hiring a CPA can, itself, be a tax deduction.
These are three of the top concerns e-commerce entrepreneurs should keep in mind as April looms ever closer. Have you had any difficulties with filing your taxes as an e-commerce business or independent contractor? Share your story in the comments below!