The payment of state and federal income taxes is required for all businesses, whether they operate online or have a physical presence. However, the payment of taxes by online businesses is still hotly contested in most states in the United States.
Normally, businesses are supposed to pay retail sales taxes depending on the laws applicable to their states of operation. Online businesses have not paid this tax in many states for many years, not unless they have a physical presence in those states.
However, things are now changing. Different states have adopted different rules that require online businesses to pay taxes. Other rules exempt them or provide them with certain tax deductions. Here are a few important things all online business owners should know about tax;
You Can Use Tax Deductions to Lower Your Tax Bill
Most online business owners have limited budgets and have to stretch the little that they have. Despite this, they still have expenses such as business travel, wages, vehicle expenses, business insurance, utilities, equipment, and supplies, among others.
As an online business owner, you should understand that you can lower your tax bill using these expenses. All you need to do is to ensure that these operational expenses are written off when preparing for tax payments.
Fortunately, technological advancement has made this easy for business owners. Using accounting applications, you can easily track all business expenses throughout the year. When it comes to the tax season, these applications can calculate the tax you need to pay for you.
Be Wise When Choosing a Legal Structure
An online business is a business like any other. You are required to register just like you do when starting a traditional (or brick-and-mortar) business. When doing this, you need to understand all the legal structures you can choose from.
This is because each of these legal structures comes with different tax requirements. Some of the most common legal structures available in the US include LLCs (Limited Liability Companies), C Corporations, S Corporations, and Sole Proprietorships.
For instance, Sole Proprietorships, the most popular business entity in the US, are allowed to deduct twenty percent from their net income when paying taxes. LLCs operating in a state like California, on the other hand, have to pay $800 annually, whether they are making a loss or a profit.
Receiving Products in Return for a Review is Considered Taxable Income
If you are running an online business where you receive products in return for a review, then you need to understand that this is considered taxable income. This is because it is assumed that you have engaged in a business transaction.
But how? Well, you are trading the review which might involve hours of using the product, creating content, and sharing it online for the product. It is, therefore, important for you to understand the mandatory requirements as an online business owner.
It doesn't even matter whether you solicited this product from a business or not. The most important thing is the fact that you got this product. In addition, you did not get it for free, it was in exchange for something else - a review.
You Can Write Off Startup Costs
Most online business owners do not know that they can write off their startup costs. They assume that these expenses can only be deducted when their businesses are established and fully operational.
Fortunately, the IRS has a set of rules that makes it possible for small businesses, whether online businesses or not, to deduct startup expenses even before the businesses are fully operational. If your startup costs do not exceed $50,000, you can deduct up to $10,000 ($5,000 for organizational costs and $5,000 for business startup).
Some common expenses you might incur when starting an online business might include insurance costs, professional fees such as hiring accountants, loan fees, business cards, and office supplies, among others. All these costs can be written off.
Shipping Restrictions
Online business owners need to know about shipping restrictions that are set by distribution companies or state laws. When starting your online business, it is advisable to research your products and find out if any of them have shipping restrictions.
Some of the most common products that might have shipping restrictions include live animals, cigarettes, alcoholic drinks, airbags, aerosol containers, explosives, ammunition, weapons, nail polish, perfume, cosmetics, and perishable items.
However, you can ship some of these items but at some fee. You need to look at guidelines from the Federal Trade Commission on tax, customs, and duty laws regarding restricted items.
Understanding the things discussed above is going to help you avoid issues with tax payments when running your online business.