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CHAPTER 1

Introduction To Shopify Business Sales Taxes

In the eCommerce industry, Shopify business taxes have become a hot topic of discussion.
Many questions revolve in one’s mind –
What are Shopify business taxes? Whom to pay? And so on….
To get clear answers to these questions, we are here to provide you with a complete picture of business taxes on Shopify.
We will cover Shopify company taxes in the first chapter, including how they operate, how to charge them, where to pay them, and which IRS regulations to adhere to.
Let’s navigate Shopify’s company taxes.
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In the online space, there are more than 1 million new Shopify stores; many new entrepreneurs are becoming a part of the eCommerce world. It is also true that more than 60% of purchases are made online. But it doesn’t mean owning a Shopify store will eliminate the need for tax authorities. 

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.

CHAPTER 2

Managing Shopify Taxes - Must-know Deductions

Even though tax season is inevitable, you may lessen its pain by utilizing all of the deductions that apply to you as an e-commerce business owner.
Make a note of the deductions that apply to your business. Be sure to retain your receipts and tax records for each deductible business expense throughout the year to claim these deductions when the next tax deadline approaches.
If you have an online Shopify store, investing a portion of your income in tax-deductible business expenses can boost revenue and save you money at tax time.
We’ve put together a list of common tax deductions for online retailers to assist you.
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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.

CHAPTER 3

IRS Guidelines For Shopify Sales Taxes

Many new business owners are joining the Shopify community. There are more than 2.5 million new stores on Shopify.
It is a must for Shopify stores to understand the necessity of filing the taxes.
You may be concerned that the process will be more difficult if you run your company through a third-party platform like Shopify.
When it comes to taxes, Shopify’s main role is to send you a 1099-k tax form. We will walk you through how to obtain that form and what to do with it in this chapter.
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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
Utilize them to reduce your tax liability. That's because you're not taxed on the money that really comes in from Shopify and your other payment methods, which is your gross revenue. You can deduct all of your operating costs for your store to determine your taxable income:

  • Gross income is the sum of all of your year earnings.
  • Taxable earnings: subtracting your business expenses from your gross income
Let's start with the cost of products sold and discuss how to determine your business expenses.

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.

CHAPTER 4

Shopify Business Taxes FAQs

Do you have any inquiries regarding Shopify’s sales tax?
We have your back!
Here are some of the frequently asked questions about Shopify taxes that we have addressed. You ought to monitor it. Please get in touch with us if you have any more inquiries.
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Should Shopify Owners Collect Sales Tax?

Sales tax collection and submission on behalf of its merchants are not required by Shopify. Shopify is therefore exempt from the marketplace facilitator regulations that require firms like Amazon or eBay to gather and remit sales tax on behalf of its sellers. State taxes are consequently the responsibility of the Shopify seller.

Does Shopify 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.

Is a sales tax permit required to do internet business?

Most states require a seller's permit whether or not your online store sells goods that are subject to taxation. You'll need one whether you run your business entirely online or from a physical location. A seller's permission on Shopify enables you to avoid paying sales tax, but it is still required.

Conclusion

Due to Shopify’s ability to expand its customer base online, millions of merchants can scale their operations. Take the time to comprehend your company’s sales tax requirements to get the most of this e-commerce platform.
You may easily maintain tax compliance with your Shopify sales tax by figuring out where your company has economic nexus, registering for your sales permit, and completing your sales tax reports on time.
Don’t hesitate to contact Free Cash Flow. io if you require assistance in Shopify sales taxes. Keep in mind that your aim should be to grow your company over time. Do everything you can to facilitate your company’s continuous growth right now. You’ll subsequently thank yourself for it, we promise!
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