Whether you own an e-commerce store or provide a service, it’s helpful to know the ins and outs of doing taxes. That way, you can stay compliant with the IRS and your state. You could end up with penalties and even more fees without paying taxes.
Plus, knowing how to do your taxes allows you to focus on more important things, like running your business and keeping up with your kids. Here’s a helpful layout for doing taxes for your online business.
The Different Types of Taxes for Online Businesses
When you start an online business, you must follow the same regulations as a new small-business owner. Consulting with a tax or accounting professional can help you fully understand your tax obligations.
However, these are the different business taxes for you to know about:
- Sales taxes
- Estimated taxes
- Employment taxes
Estimated and employment taxes are taxes you must pay the same way as someone who owns a physical storefront. The estimated taxes are essentially taxes that cover things like income and self-employment taxes. As an online-business owner, the federal and some state governments require you to pay estimated taxes.
If you have a team of employees, you will withhold taxes from their gross wages and FICA — Social Security and Medicare — contributions based on their salaries. You are also responsible for making federal and state unemployment tax payments. However, sales taxes do not work the same way for online businesses as brick-and-mortar stores do. Here’s an overview of how sales tax works.
What Is Sales Tax?
Sales taxes are consumption taxes the government imposes on the sale of goods and services in certain states. In other words, consumers pay a taxable percentage of the total sale when they complete an order.
Though the customer pays for the tax, you still have to collect, deposit and report the tax. Essentially, you are the middleman between your customers and the government. You must tax your customers at the point of sale.
States also specify which goods and services are taxable. That is where it’s helpful to speak with a tax professional to get an understanding of sales tax, because not all goods and services are taxable. For example, Pennsylvania exempts sales taxes on all clothing items. Meanwhile, it taxes food and beverages at establishments but not grocery stores.
States may also determine what the rate is for a sales tax. Yet, it’s important to note that not all states charge sales tax — including Alaska, Montana, Delaware, Oregon and New Hampshire. Hawaii doesn’t charge sales tax either, but they do have a GET (General Excise Tax), which applies to all sales.
Your online business may have a sales tax responsibility if you sell goods and services. However, internet sales tax laws can be complex.
Reporting and Paying Sales Tax
Ensure you keep track of your sales tax liability. You will have to remit them to your state by the given deadline. Due dates will depend on your state, so check with your state to access directions on how to file your sales tax.
Once you’ve checked with your state, you can start collecting and filing these taxes, depending on your sales volume. The filing frequency can be monthly, quarterly or annually. You must also report your sales tax to the applicable agency. That way, the government can know how much tax they receive from you. Consider checking with your state about sales tax responsibilities and frequencies.
How to Prepare and File Your Online Business Taxes
Now that you’ve gotten an overview of how each category of taxes works, you can start preparing and filing your taxes.
1. Keep Tax Deadlines in Mind
The tax deadline for income tax returns typically falls on April 15 unless this date falls on a weekend or holiday. However, self-employed individuals must make quarterly tax payments. They have pre-set deadlines throughout the year.
To avoid tax penalties, consider adding these important dates to your calendar:
- January 15: Fourth quarter tax payments are due.
- January 31: This is the due date for employers to send W-2 forms. Additionally, if you’ve paid an independent contractor over $600, you must send Form 1099 by this date.
- April 15: The first quarter of estimated tax payments is due.
- June 15: The second quarter of tax payments is due.
- September 15: This is when the third quarter of tax payments is due.
- October 16: This is the deadline to file an extended tax return.
2. Gather Your Receipts
If you have paper receipts, getting these in order is essential. Keep in mind that it’s much easier to store your receipts online — it will save you more time than sorting through stacks of paper at the last minute. Some tools are available to keep your receipts organized.
3. Update Your Bookkeeping
Before filing your taxes, you must ensure you update your books. Clear bookkeeping will give you a better view of your business’s income and expenses. They also help you in case the IRS wants to audit your books.
You can use accounting software for your small business to ensure you keep track of everything. Alternatively, you could hire a professional bookkeeper if it’s within your budget. It’s ultimately up to you to choose the best method based on your time, budget and confidence in managing your books.
4. Submit 1099s
If you’ve paid an independent contractor over $600 within the tax year, you should have sent Form 1099 to your contractor by January 31. If you file electronically, you’ll also need to submit your copy to the IRS by March 31.
5. Deduct Your Taxes With Business Expenses
You must keep track of your business expenses to reduce the taxes you owe to the government. These are known as tax write-offs, which allow you to deduct them from your taxable income. You may also consult an accountant to see if some of those expenses fall under the “start-up costs” category.
Here are the most common deductions to note:
- Home office: This deduction requires you to use your home office consistently and it should be a room you primarily use for business purposes. You can calculate your home office deduction with the simplified or regular methods.
- Education: You can deduct educational expenses, including courses or workshops.
- Phone and internet: You can fully or partially deduct your phone bill, depending on whether you use it solely for business or personal and business use. The same deduction applies to your internet bill.
- Web hosting and online store theme: Deduct your domain registration, web hosting and online store template as a business expense.
- Contract work: Contract labor is deductible if you’ve hired an independent contractor.
- Shipping: Shipping costs — like postage and packaging — are deductible.
- Gas and mileage: These are common tax deductibles you can track if you use your car for business trips.
- Online services: If you use apps or pay online service fees for your business, you can deduct them.
- Equipment: Your business computer, cell phone and camera are some equipment you can use to deduct. However, it’s best to work with an accountant to help you recover the depreciation.
- Professional services: Any legal or professional fees tied to your business are deductible.
6. Gather Your Records
Once you’re ready to start filing your taxes, ensure you have all your records in front of you. If you’ve kept track of your transactions throughout the year and recorded them in one place, it will be simple to calculate all your income and expenses.
7. Find the Right Tax Form
You’ll need to find the correct IRS tax form to report your earnings and to see how much you may owe on taxes. For small-business owners, you can use Form 1099 to report your income and expenses on Schedule C.
8. Fill Out Your Tax Form
Once you’ve found the proper form for your business, you can start filling it out with the available options. Search the IRS website for your copy, use an online service or have a tax professional do it for you.
The easier option would be to use TurboTax to file your taxes — as it can help guide you throughout the filing process. It also has tax consultants available to help if you have questions.
You can also go to a tax professional online or in person to have them fill out your forms for you. This would be the easiest way to file your taxes, but you may be paying a higher fee than doing it yourself.
Remember the deadlines for when you need to file your taxes. As mentioned previously, the deadline for Form 1099 is due around April 15.
Make It Easy to Do Your Taxes
Navigating your taxes and filing by the deadline may seem overwhelming. However, preparing and filing your taxes can be easy when you stay organized. Ensure you keep records of your sales tax, business income and expenses and withheld taxes if you have employees. In addition, it helps to schedule your tax filing deadlines according to federal and state.
Consider scheduling these in your calendar and setting up reminders. Remember — you can always speak with a tax professional about the state laws on sales tax and anything else related to your business.
Now that you have a basic understanding of how to do your taxes, it won’t be as stressful when tax season is here.