You are running your store, you are making 100/day, 1000/day, oh man 10,000 a day….and you are dreaming about that ferrari….you’re gonna buy and then…
(STOP SIGN SOUND)…the IRS COMES HUFFING AND PUFFING AND BLOW YOUR DOOR DOWN.
Because you probably assume…
Yeah, Shopify doesn’t pay your taxes. We do.
Hey guys, Alan Chen, CPA, here. In this video we want to go over a simple, but often mis-google question. Yes I just came up with the term Mis-google it basically means when you try to google something and you believe the first answer that google gives you when oftentime that may not be the right answer.
So a lot of online business comes to us thinking that Shopify submits taxes on their behalf. Maybe they think so because Shopify has a Sales Tax Remitting function or it’s because they sent you some tax forms during tax season last year and they reported your revenue there.
But nope, that tax form is for informational purposes only and it just aids in you filing your taxes because ultimately it is your responsibility to pay the appropriate amount of taxes to the various jurisdictions.
Since we are here, let’s talk about all the taxes you as a shopify owner need to be worried about.
- Federal Income
- State Income Tax
- LLC Tax Fees
- Sales Tax (Home State)
- Sales Tax (Economic Nexus)
- Sales Tax (Physical nexus)
You should focus your attention on these categories in order to make sure you can cover your basis when thinking about what part of your profit you should reserve for your taxes.
Is it very important to set aside possible 20%-35% of your profit in a separate bucket or account just for your potential tax payment, in fact that is highly encouraged.
Another tip would be to start making estimated payments to the IRS.
What does that mean?
Well a common mistake business owners make is assuming that for them tax time is only during April 15th. Well for Business owners who are making 6 figures and more, this starts to become less and less true.
For the 6 figure plus business owners, the IRS actually expects you to make Quarterly payments. That means every 3 months you should be thinking about how much profit or revenue your business is going to make and what tax bracket you will fall into and make an estimated tax payment to the IRS and your state government if you live in a state that collects state income tax.
This is important to do as the IRS looks down upon underpayment of tax and will charge you a penalty during tax time if you do not make quarterly payment.
To avoid this, make sure you start submitting your tax payment on a quarterly basis!
Now that covers #1 #2 above. What about LLC tax Fees? LLC tax fee is often forgotten by business owners, but it is important to keep track of if you have to register in a state that has LLC tax fees. If your LLC will make more than $250,000, you will have to pay a fee. LLCs must estimate and pay the fee by the 15th day of the 6th month of the current tax year. Let me show what California is (shows charts)
As you can see it can be quite steep and if you don’t pay it on time, you will be subjected to penalties and interest.
Now we will turn our attention to sales tax. We have several videos on sales tax already on this channels so I won’t go too deep here. But the idea is that you have to have a good grasp of the timing of each state’s sales tax rule to make sure you are in compliance with all the states that you have a large concentration of customers in.
Only this way, will you ensure you won’t have to pay too much in sales tax and can avoid paying unnecessarily to states that have more lenient sales tax ruling. Make sure you also do this check on a quarterly basis as some states have rules that as soon as you cross the sales tax threshold for that state, a common figure is $100,000, if you cross $100,00 for a certain state, you may have to start remitting sales tax immediately.
So what’s the takeaway here?
The takeaway is definitely to not rely on shopify to handle your tax situation. Even if they could, I wouldn’t rely on them. They are not professional CPAs, even if there is a function built in to help you prepare your taxes, I would highly recommend you take those figures to a CPA that specializes in the business you’re in to ensure you are getting back every single penny you deserve.
That’s the kind of boss move you should be making for your business as a CEO or founder to continue to keep your cash flow flexible and use it to create more revenue opportunities for your business to scale it to an even higher level. TO the mooooon (Elon meme here)