Understanding tax as a startup eCommerce business can be tricky, particularly if you operate in multiple states or countries. Even for more established companies, it can be hard to monitor constantly evolving policies.
Organizing and filing your taxes doesn’t need to be complicated, though.
To keep you on your toes and ensure your business is in line with current regulations, we’ve identified four potential tax pitfalls your eCommerce company might face. If you face any of these issues, you’ll be able to deal with them smoothly!
Your eCommerce business will face serious issues immediately if your bookkeeping system is ill-organized and inaccurate.
Particularly for startup eCommerce stores, it can be chaotic trying to keep track of all your income and expenses, so regularly and properly updating your books is vital.
Your records must be pretty comprehensive, so you’re prepared for tax return filing. You should keep all sales receipts, bank and credit card statements, expense invoices, and employee records. Everything should be streamlined for easy retrieval, so opting for accounting software to digitize all your records is a fantastic option.
In addition to keeping all your records accessible, you need to make sure you are categorizing everything correctly. Ensure that you have an understanding of how to define your expenses properly.
You need to correctly categorize your employees according to their status for tax purposes, whether they are permanent staff members on the regular payroll or a freelancer.
You’ll also need to be able to define your allowable expenses correctly. These are the expenses you incur that are essential for running your business. This includes the cost of your computer and printer, web hosting and maintenance, stock, transport, rent and utilities, insurance, and accountants.
Failing to have full and accurate financial records is the first pitfall you may fall into when it comes to organizing your taxes.
Determining Which Regulations And Customs To Follow
It can be tricky to determine what tax regulations and customs you must adhere to when you’re supplying products nationally and internationally.
Generally, your business is only obligated to pay tax in the state or country you operate in, even if you provide goods abroad.
In the US, states cannot collect taxes from your business unless you have nexus; you have a physical presence there, actively conducting business from that area.
After confirming who you owe tao, there are further issues to consider.
Concerning VAT, in the UK, for example, when your company earns over £82,000 on VAT-taxable goods in 12 months, you must register for VAT or face a fine. So make su they monideterminesmine if your liability changes over time.
And in terms of charging your customers VAT, you’ll need to work out the right amount to charge. In the UK, it is generally charged at 20% standard. However, some products can be charged at a reduced rate of 5% or 0%. If it’s 0%, your customer is not obligated to pay VAT, but you must still register the sale with HMRC.
Some citizens in different countries have different preferences regarding how prices are displayed on eCommerce websites about VAT. For example, in the US, prices are displayed exclusive of tax, but in places like Australia, they want it to be all-inclusive.
Your next potential pitfall is ensuring you understand your tax obligations at a governmental level and what your target customers desire.
Paying Too Much
With all the different rules and regulations to follow in different areas, you may fall into the trap of paying taxes twice on the same income.
Countries like the UK have an extensive network of double taxation treaties to ensure taxpayers aren’t forking twice on the same portion of the money. So be aware of where you are obliged to pay tax and on what, and keep an eye on your outgoings.
Another way you may fall into the trap of paying too much is by failing to claim the appropriate deductions. Again, it would help if you did intensive research to determine what deductions you can claim.
Expenses like using a portion of your home as an office can be deducted, alongside any utilities and home repairs that need to pay for for you to carry out business properly. In addition, insurance costs and interest paid on business accounts, as well as shipment and packaging expenses, are all tax-deductible.
Make sure you don’t pay out more than you need to, or you risk falling into this third pitfall!
Keeping Up With Regulation Changes
Once you’ve pinned down exactly what rules and regulations you must abide by, you might fall into the trap of not keeping up-to-date with ongoing policy amendments. Fines may follow.
You must consult local experts to keep you informed of the taxes and tariffs in the country you are operating in to keep you on the right track.
The law is fluid, so that you may be in line currently, but it could change in the blink of an eye, tripping you up.
Avoid These Pitfalls!
These four tax pitfalls are easy to fall into but are just as easy to avoid as long as you equip yourself with the right knowledge.
Whether you take on all your bookkeeping alone, hire someone internally to do it, or reach out to an external accountant, you need to be aware of and understand the consequences of these potential hazards to keep your eCommerce business out of hot water.
About The Author
Emily is a writer for specialist small business accountants and tax advisers, Tax IQ, based in Edinburgh, Scotland. She regularly pens articles demonstrating the company’s expertise in various matters to benefit freelancers, contractors, SMEs, startups, and limited companies.