Running an internet business has its unique advantages, but what about taxes? Here’s everything you need to know about online business taxes.
States receive 13% of their revenue from sales tax and another 13% from income tax. This means states take their tax collection seriously for all individuals and businesses.
The type of business you have will affect how you have to deal with sales and income tax though. Online business taxes will differ by state, but there are some general rules you can follow to make sure you stay within the law.
Understanding Online Business Taxes
Tax laws differ for individual and business taxes. There’s also a difference between the types of businesses that file.
To make sure you meet tax requirements, you first need to determine what type of business you have. This means determining if your business is a sole proprietorship, a partnership, or a corporation. It also means determining if you have a physical or online business.
Some businesses will have both physical and online sales which will affect how you collect and file taxes. Keep in mind, your business is responsible for both state and federal taxes.
Income Tax for an Online Business
If your business is primarily online, you’ll usually pay income tax as a sole proprietorship. A sole proprietorship means you’re an individual running a small business. This is the simplest way to file income taxes.
You’ll file your business taxes with your individual taxes. You must declare all income generated from your business on your personal tax form. You can still deduct all the costs involved in running your business though.
With a sole proprietorship, you can also deduct any losses involved with your business. If you have other income you can deduct these losses against the other income making filing easier.
If you work out of your home, you can even deduct certain home expenses that affect your business needs. This includes utilities and travel. It’s important to check with an accountant to determine how to make these deductions.
Sales Tax Laws
The laws for sales tax will differ based on what type of business you have and what state you’re in. If you have a physical presence in a state, you’re required to collect and pay sales tax. A physical presence includes
- An office
- A warehouse
If you’re unsure about your business’ physical presence, you should check with your state’s department of revenue to determine if sales tax will apply. Generally, a home business is not considered a physical presence, but this may differ between states.
This rule includes your home state and any states where your business has a connection to a physical presence. So, if you work with another company, such as Amazon, to fulfill shipments, sales tax for states associated with their warehouses may apply.
You will also need to check about local taxes. Some cities have their own sales tax separate from the state, so contact your local government office to make sure you comply with sales tax laws where you’re located.
Online Sales Tax
If your business is an online business, you may still need to collect and pay sales tax. In 2018, the Supreme Court ruled that states can tax internet sales for people with a state presence, even if it’s not a physical business presence.
You’ll need to check the rules for your state to determine if internet sales tax applies to your situation. The way they require you to collect taxes will also differ between states.
Many states have rules that require you to collect sales tax on online sales if you have an economic connection to that state. This means if you live in one of these states, you’re required to collect and pay sales tax no matter where you’re selling to. Some of these states have a minimum on the sales revenue before you have to collect taxes, so check out your state’s economic threshold.
Other states may only require you to collect sales tax from customers in the same state as you. This means you’ll need to have methods in place to collect taxes from these people but not other customers.
Tax Requirements for Affiliate Sales
If you plan to take part in an affiliate program, you still may have tax requirements for your business. The laws regarding affiliate sales will differ by state, so check on your state requirements.
An affiliate is someone who receives a commission for sales or clicks to a third-party seller. If you act as an affiliate you can’t depend on the seller to take care of the tax issues for you.
If your state requires you to collect taxes for purchases through affiliate links, you’ll need to know what the minimum revenue requirements include. Some may require taxes for any sales and others for a certain amount of sales.
In some states, the burden of collecting taxes falls on the affiliate marketplace. This means the person providing the items for purchase will take responsibility for collection rather than the affiliate. This can get tricky if the marketplace is in one of these states and the affiliate is in a state that requires them to pay taxes.
Make sure you understand the agreement if you sign up as an affiliate. If they live in a state that requires them to collect taxes, make sure they’re following these requirements. If in doubt, contact your state revenue department to determine what you need to do to comply with tax laws.
Understand Your Business Financial Situation
If you plan to run an online business, it’s important to understand your state’s requirements for online business taxes. You also need to understand your financial situation to get the most out of income tax deductions.
Every little bit helps with a sole proprietorship. If you’re not sure where to start, check out more tips for business taxes and other financial needs right here on our site.