Retail Business Tax Considerations
Are you filing your taxes on time? Do you know your sales tax nexus? Want help getting started retail business tax considerations?
Are you filing your taxes on time? Do you know your sales tax nexus? Want help getting started with these complicated issues? Retail and e-commerce business owners face unique and often complex tax calculations. In this webinar, created in partnership with the FedEx Master E-commerce Program, you will hear from e-commerce experts about preparing your business for tax season throughout the year, ways to make your tax season easier, and where to turn for trusted help. Let our experts guide you through retail business tax considerations.
Meet the Expert
Oren Shani
Oren Shani is a credit advisor and certified business coach with Accion Opportunity Fund. Oren has over 10 years of experience managing businesses and advising other business owners. He started, managed, and expanded his own business, providing disability accommodations for live events across the country. He now helps entrepreneurs launch and grow their own businesses.
To schedule a free meeting with Oren or any of our expert business coaches, please visit AOF’s Coaching Hub.
Retail Business Tax Considerations
How can small business owners who sell retail products online prepare for tax season?
- Get Organized: The number one thing you can do to have a smoother tax season is keep your business finances organized. First and foremost, separate your personal and business finances. It’s also essential that you use an accounting system (not just your Point of Sales, or POS, system that can easily pull financial reports needed to complete your taxes, like a Profit and Loss Statement.
- Know Your Deadlines: Tax deadlines vary by your business type. It is important that you research and know your tax deadlines. Save them in a calendar and give yourself plenty of reminders as you approach tax season to avoid a time crunch or late fees and penalties.
- Know What You Need: If you are outsourcing, know what you need to share with a tax professional so they can quickly and correctly complete your taxes. Tax professionals will typically need your previous year’s taxes (if this isn’t your first year in business), your sales records, receipts for all of your expenses, and any other financial documentation or reports that you have.
When should small business owners begin to prepare for tax season?
Tax deadlines vary by your business type. Sole-prop, LLC, partnerships, C-Corp, and S-Corp are the most common types of business entities. Learn more about tax deadlines here and consult with your tax professional about tax considerations for retail business apply to your unique situation.
Types of Taxes for Retail Businesses
E-commerce businesses face unique tax requirements. E-commerce businesses typically have to pay the following types of taxes:
- Income Tax
- Employment Tax
- Self-employment Tax
- Sales Tax
- Excise Taxes
- Economic Nexus
- Duties and International Taxes
Consult with your tax professional in advance of tax season to learn which types of taxes are relevant to your business. Let’s explore these common tax types in more detail.
Income Tax
All businesses must file a federal income tax return each year to the IRS. Other income tax requirements vary depending on the state and the legal entity of the business:
- All businesses must file a state income tax return, except businesses based in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- Partnerships only need to file an information return.
- Business taxes are supposed to be paid throughout the year (quarterly), not at the time the taxes are filed.
- The type of business entity will determine how taxes are paid.
Employment Taxes
As an employer, you have to pay taxes withheld from your employees’ paychecks. An employee is any worker with taxes taken out of their paycheck. You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes.
You are also required to issue a Form 1099-NEC to most contractos that worked with your business. For any contractor to whom you made payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, use From 1099 to report certain payments you make in your trade or business.
Self Employment Taxes
If your net earnings (profit) from self-employment were $400 or more, you must pay self-employment taxes, including the following:
- The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare.
- You should receive 1099-NEC if you generated revenue from other businesses.
- This tax is eligible for Qualified Business Income deduction
Sales Tax
There is no federal sales tax in the US. All sales tax is paid to state or local governments. Laws vary significantly by state and can change with little to no notice. Be sure to consult with a tax professional for the most up to date information.
- You must report the amount of sales generated and remit the tax to the state specific tax agency.
- There is no state sales tax in Alaska, Delaware, Montana, New Hampshire and Oregon.
- Alaska taxes some services, and Delaware still collects a tax on receipts from businesses.
- Cities or counties within these states may still collect taxes
- You’ll apply for a sales tax or reseller’s permit, which generally exempts your business from paying tax on purchases of wholesale items.
- Some states don’t tax groceries or health-related goods like medicines, so check your local regulations for rates and exempt items.
Excise Taxes
Most businesses won’t incur excise tax. Excise tax is due on specific goods or services at the time they are purchased. Goods subject to excise taxes could include:
- Fuel
- Tobacco
- Alcohol
- Most gambling
- Air transport
- Telecoms
- Heavy duty trucks over 55,000 pounds
Economic Nexus
Much like sales tax, economic nexus requirements vary widely by state. If you are selling products to more than 5 states, experts recommend consulting with a tax professional to determine economic nexus.
In general, if you make a certain amount of sales in another state, you may be required to collect and pay sales tax for that state. That requirement is also called “having an economic nexus” in that state. Some states define nexus as “Destination-Based,” where tax is levied based on where the customer is, not the business. Other states define nexus as “Origin-Based,” business physical location determines the tax rate. Alaska, Delaware, Montana, New Hampshire and Oregon are the only states that do not charge a sales tax.
Nexus conditions in another state can also apply when hiring a remote employee, hosting a tradeshow, or establishing a drop shipping relationship.
Best Practices for Economic Nexus:
- Make sure you file business licenses in the states in which you do business.
- Determine where you have state nexus, especially destination-based nexus.
- Automate sales tax bookkeeping with software. You will still need to file and remit taxes.
- Determine if you are eligible for any exemptions, like sales tax holidays, wholesalers, etc.
- Let a CPA do all the work for you.
Accounting tools like QuickBooks can help you to calculate your economic nexus for state sales taxes. If you are ever unsure about your economic nexus, it is always good to speak to a tax professional about your unique situation.
Duties and International Taxes
Duties and international taxes are most commonly paid at the time of purchase or import. Common types include:
- Import Duty
- GST (Goods & Services Tax)
- VAT (Value Added Tax)
- DDP (Delivery Duty Paid)
- DDU (Delivery Duty Unpaid)
What types of business taxes do I need to pay based on MY business type?
The types of taxes that you pay and the tax forms that you need to file vary based on your business entity. Common business entities and their tax implications are listed below.
| Sole-Prop | Partnership | LLC | C-Corp | S-Corp | |
| Definition | Owned by one individual. The business has no existence apart from the owner. | Existing relationship between two or more persons who join together to carry on a business. | Formed under state law by filing articles of organization as an LLC. The members of an LLC are not personally liable for its debts. | A legal entity or structure consisting of shareholder(s).
Since a corporation is an entity in its own right, it is liable for its own debts and obligations. |
A legal entity or structure consisting of shareholder(s).
Since a corporation is an entity in its own right, it is liable for its own debts and obligations. |
| Tax Implications | Business liabilities are your personal liabilities. Income and expenses of the business are included on your personal tax return. and business profits are taxed as personal income.
|
A partnership does not pay tax on its income but “passes through” any profits or losses to its partners. Partners must include partnership items on their tax or information returns. | An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity separate from its owner. Single-member LLCs are taxed like sole-props. | The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. | An S corporation helps avoid being “double taxed,” as in a C-Corp. It is exempt from federal income tax other than tax on certain capital gains and passive income. |
| Tax Forms | Schedule C, Schedule C-EZ, or Schedule F, as part of Form 1040, U.S. Individual Income Tax Return. | Form 1065, U.S. Partnership Return of Income, plus other returns that apply. | Varies. | Corporations usually file a Form 1120 series return, plus other returns that apply. | Corporations usually file a Form 1120 series return, plus other returns that apply. |
Business Tax Deductions
A business tax deduction is an incurred expense that reduces your taxable income and, as a result, the taxes that you owe.
What can business expenses can I deduct?
To be deductible, a business expense must be ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your field of business. Deductible expenses must relate directly to the work of your business and you cannot have been reimbursed for it.
How do I deduct expenses on my business taxes?
To deduct expenses you must collect all receipts and documented expenses that the business incurred over the tax year. You cannot deduct a business expense without supporting receipts and verified expenses. Remaining income after deducting expenses is your net earnings and is taxable.
What are some signs that a business might be ready for professional help with retail business tax considerations?
If you are already running a business, you are ready to consult with a tax professional. The extent of that professional help will vary depending on how complex your business and business taxes are. If you are selling in many states or purchasing and depreciating large assets like real estate or equipment, you should talk with a tax professional.
Working with a tax professional doesn’t only help you get your taxes submitted by the due date, they can also help you craft a long term tax strategy. They can help you determine the best tax strategy for your business’ long term success.
What is A step or action that business owners can take today to get ready for the tax season?
- Get your accounting up to date.
- Track your revenue, expenses, net earnings, preferable in a dedicated accounting software.
- Make sure you have all of your receipts.
- Get your paperwork in order to minimize how much you are going to be paying your tax advisor. The more organized you are, the fewer hours your tax advisor will have to spend on your taxes.
Disclaimer: While we are so excited to share this impactful information on taxes, this webinar and article are informational and do not constitute official legal, accounting, or tax professional services. We always strongly suggest chatting with your tax professional or accounting service about your specific business needs and retail business tax considerations.