A business is an exciting venture – you get to be the boss and run it the way you feel best. But, as exciting as it is, business owners have a pile of responsibilities as well.
Well, imagine this: You are working all day long to grow your business. But, during the tax season, you are hit by a sea of penalties and unexpected bills to take care of.
It is a very common reality that every business owner is scared of. In fact, a solid ninety percent of business owners said that the federal business income tax comes as an insurmountable financial burden for them.
However, this does not mean you have no way out. We mean, plan your eCommerce tax when you still have time. Simply put, when you plan your taxes, you could easily save up much more than you realize. That is money on the table and can be reinvested back into the business or simply taken home as pure profit.
That’s the route effective tax planning gives your eCommerce business. In this blog post, we will explore more about what tax planning is, its obligations, and so much more. So, stay tuned!
What is Tax Planning?
Tax planning is basically when you “plan” your finances in order to pay less in taxes, while being completely compliant with the laws. It is an incredibly important part of running an eCommerce business, as it helps keep more of what you have earned in your pocket.
One of the most significant aspects of tax planning is knowing what your sales tax duties are. This is where you need help from an eCommerce and sales tax expert who knows how to tackle different tax jurisdictions seamlessly.
When you plan your taxes just right, you can take advantage of several deductions that come with them. For instance, if you operate your business from home, you can simply deduct part of your utility bills in taxes. But, that’s just one reason why it’s essential. There are so many more!
Why is Tax Planning Important?
As the saying goes, “A penny saved is a penny earned.” That’s how important tax planning is for your eCommerce business. Here are some of the other reasons why tax planning is considered so important:
Saves you money
Effective eCommerce tax planning for your business helps you reduce your owed taxes. When you use strategies to leverage your deductions and credits, you can slash your taxable income. That means, you get to pay less in taxes.
Better financial management
You can understand your financial circumstances much better when you plan your taxes. In other words, you get to analyze your tax obligations, prepare your bills, and prevent last-minute surprises. This can help you sustain a healthy cash flow in the long run.
Audit prevention and legal compliance
When you comply with laws and regulations, you avoid the risk of being audited as well. As you may know already, an audit is too stressful to go through. Not to mention, the amount of strain that comes if discrepancies are traced. This is where tax planning helps. You get to avoid the risk of being audited once and for all. It happens because your records are free of dispute, completely accurate, and streamlined.
Maximizing deductions and credits
If you did not know, there are several deductions and credits for eCommerce businesses. The list includes everything from shipping costs and mortgages to home office deductions, and many others. Effective tax planning helps you take advantage of these exact opportunities. In return, you get to reduce your tax bill to a maximum.
These are just a handful of many other reasons why tax planning is exceptionally significant.
The good news? You can take advantage of it, grow your wealth, and save double. All you have to do is sit down with an eCommerce tax accountant for a discussion.
Take advantage of deductions, credits, and save big on taxes.
Contact our experienced eCommerce sales tax accountants now!
eCommerce Taxes for Business Owners
There are several eCommerce taxes that a business owner must be aware of. Some of the names are:
Sales Tax
Sales tax, in other words, is the tax on sales that are made in certain states. Well, let’s make it simpler for you. If you sell your products or goods in different states, you would have to register, collect, and remit sales tax according to the rules of each state. In addition, it also depends on the “nexus”. The sales tax nexus is simply the relationship you have (as a seller) with the state that needs you to collect and remit sales tax in that particular state.
Income Tax
Income tax, as the name suggests, is a tax you pay for your business profits. As you may know, you will have to pay federal and state income taxes on the basis of your net income. Just a key thing to note: Different businesses have to file different forms according to their structure. Hold tight, we will get to that part a while later.
Use Tax
You are subject to “use tax” for the out-of-state purchases you used in your home state. Well, let’s give you an example. In case you buy products or goods from another state, but use them in any capacity in your home state, you are obligated to pay use tax. That helps to make sure local businesses do not take on a disadvantage.
Value Added Tax (VAT)
This is basically a sales tax in certain nations that have VAT systems. For context, VAT is a tax that is added to goods and services at every stage and level of the supply chain. Plus, it is also levied on the gross margin of every part of the process of producing, distributing, and selling a product or goods.
Employment Taxes
As the name indicates, employment taxes are the taxes that go on employee wages. This is where you need to withhold Social Security taxes, Medicare taxes, Federal and State Income taxes from the wages of employees.
You need to be well aware of these tax obligations to be fully compliant with the authorities. If you need to understand these taxes more in-depth, our eCommerce sales tax accountants can help!
Choosing the Right Business Structure
Your taxes and business operations depend a lot on your business structure. In fact, that’s why many eCommerce businesses get accounting help. So, let’s have a glimpse at each business structure:
1. Sole Proprietorship
This is a type of business structure where you are the only owner. In fact, you and your business are literally the same to the law. In this business structure, you make all the decisions and pocket the profits. However, remember that you will have to look after all the debts, too. That being said, this is a great choice for independent contractors and small local businesses. During tax season, you need to report this income on your personal tax return.
Pros of Sole Proprietorship
- Easy to initiate
- You are the sole owner
- A simple form of tax system
Cons Sole Proprietorship
- You are responsible for business debts
- You may have to pay more in self-employment taxes
- Often, it can be challenging to grow and scale
2. Limited Liability Company (LLC)
It is a hybrid structure combining the factors of corporations and simpler business forms. In simple words, it protects the owner’s personal assets from several business liabilities that may come along the way. LLCs give you flexibility in management and taxation. In return, business owners have the power to choose how they want to be taxed.
Pros of LLCs
- You get protection for personal assets
- You get versatile tax options
- It also comes with low administrative burden
Cons of LLCs
- It is more complicated than Sole Proprietorship
- It typically involves higher fees
- Certain states may impose entity-level taxes
3. S Corporation
An S Corporation is unique and quite different from the rest of the names you have heard. It basically allows profits and a fair amount of loss to be passed on to the personal income of the owner without the overhead of corporate tax rates. For context, it elects to pass corporate income, losses, credits, and deductions to shareholders for federal taxes. How is this any beneficial? Well, this specific structure helps people avoid double taxation on corporate income.
Pros of S Corporation
- You get personal asset protection
- You get to save on self-employment taxes
- Ownership transfer is simple and hassle-free
Cons of S Corporation
- It is limited to 100 shareholders
- It comes with a complicated structure and regulations
- It has much stricter operational needs
4. C Corporation
A C corporation is very different in nature from the rest. It is technically a standard corporation, which is deemed a separate legal entity from the owners (i.e., shareholders). In simple words, the corporation can basically have its own assets and liabilities. That also means it is separate from the personal assets of shareholders.
Pros of C Corporation
- It is much easier to raise capital
- It provides strong personal asset security
- You have no restrictions in shareholder numbers
Cons of C Corporation
- The strain of double taxation (both personal and corporate)
- It needs more significant maintenance costs and has a higher setup price
- The regulatory and reporting requirements are too complex
5. Partnership
As the name suggests, a partnership is a structure wherein two or more people oversee, manage, and operate a business. Furthermore, they also contribute funds, labor, assets, or skills. There is one key thing to note here. For certain tax needs, partnerships are considered “pass-through” entities. This means that the profits and losses go through the individual tax returns of the partners involved.
Pros of Partnerships
- It is comparatively easy to form
- The financial responsibilities are shared
- It involves pass-through taxation
Cons of Partnerships
- The partners available are responsible for business debts
- There will likely be disagreements between partners
- There are self-employment tax obligations for every partner
Common Tax Planning Mistakes to Avoid
Even one tax planning mistake can cost you a chunk of money as an eCommerce business owner. Here are some of the most common mistakes you should avoid:
Avoiding Sales Tax Requirements
If you are a business owner, you should not fail to handle sales tax. This is particularly important if you are selling in more than one state. Some recent legal changes imply that you may need to register and collect taxes in states where you sell massively. If you are not following it, you may be hit with back taxes or expensive penalties.
Incorrectly Classifying Workers
Misclassifying your staff and workers can lead to fines, penalties, and prominent legal problems. That being said, classify your workers properly as either freelancers or employees. The Internal Revenue Service (IRS) is taking stricter steps day by day. So, be aware.
Mixing up Personal Finances with Business Finances
If you are a business owner, you need to keep this in mind positively. Keep your personal finances separate from business. It makes tracking expenses accurately double the effort. What’s more, you may miss out on significant tax deductions. Plus, if the IRS looked closely, it would seem like a big red flag.
Neglecting Estimated Taxes
You can be hit with penalties if you do not pay estimated taxes every quarter. Well, it’s no joke. The IRS can fine you for underpaying, depending on the time till which you did so and how much of it.
Why Hire a Tax Accountant to File Your Taxes?
All we can say is that it would be a good move. Let’s face it: You would not know a lot about the hidden opportunities you have to save on taxes. But, an eCommerce tax accountant? They have been practicing and understanding these exact hidden opportunities for a long time now.
Additionally, they know the ins and outs of the laws in each state. Not to mention, they are always up-to-date on the changes happening around them. In fact, you’d make a lot fewer mistakes in tax returns, filing, and even IRS audits – if you had an eCommerce tax accountant by your side.
Final Thoughts
That’s about it. Now that you have come to the end of the blog post, you know that eCommerce tax planning consumes a lot of time and energy. But, that’s not even half the story. Effective tax planning needs:
- An eye for detail
- Consistent efforts
- Intimate tax knowledge
At the end of the day, if your goal is to save big on taxes and reinvest it back into the business, here’s a piece of advice. You still have time to plan it accurately, timely, and without any errors.
Get in touch with The Ledger Labs today and plan your eCommerce and sales tax. With us, you will never make an error on a return. Book a consultation.
