As an ecommerce business owner, you have a lot on your plate, and it can be easy to let taxes slip to the bottom of your to-do list. However, failing to file and pay your taxes can have serious consequences.
In this post, we’ll explore some of the most common eCommerce tax mistakes that business owners make.
- Messy bookkeeping
- Not saving enough for taxes
- Getting behind on your taxes
- Trying to DIY their payroll taxes
- Moving from a LLC to a S Corp too early
- Switching from a S Corp back to a LLC improperly
Mistake #1 – Messy bookkeeping
If your books are a mess, this can lead to stress time at tax time when you are scrambling to get everything you need.
It is even worse if you are thinking about selling your business in the next couple of years. A buyer is going to want to see up-to-date financials, including inventory accounting. Having sloppy recordkeeping can lower your valuation or even derail a sale altogether.
Solution: Hire a bookkeeper or an eCommerce accounting firm, like Bean Ninjas, so that you don’t get behind in the first place.
Mistake #2 – Not saving enough for taxes
Using a cash flow management system, like Profit First, can make this process a little simpler since you are allocating money for tax into a separate bank account each month. As long as your allocations are close enough and you are actually setting aside the money each month, you shouldn’t be surprised by a bigger tax bill.
This should also include registering and paying sales tax in any state where you have nexus. Ignoring sales tax requirements is not a good idea, as it is only a matter of time before states catch on.
Even if you don’t have enough money to pay your tax bill, you can at least proactively get on a payment plan. You are going to pay some penalties, but that’s better than not filing at all, which will eventually catch up to you.
Mistake #3 – Getting behind on your taxes
One of the most common mistakes new eCommerce businesses make is getting behind on your taxes in the first couple of years. It happens. You don’t realize how much money you’re earning because your cash flow doesn’t actually match your taxable profit, with inventory not being deductible until it’s sold. Then, you don’t manage cash flow properly, so you are surprised by a big tax bill.
For instance, let’s say you have a million dollars in profit. Right before you have to pay your taxes, you buy up another million dollars of inventory, so now you’ve got zero cash and a $300,000 tax bill. That turns into a cash flow problem or, worse, a real problem if you never turn your inventory. So, you file a tax extension. 6 months turns into a year, 2 years, and suddenly it has been 5 years since you last filed, and you owe a boatload of money to the IRS.
A simple solution to avoid this predicament is to hire a bookkeeper and make sure you are setting aside enough money for taxes in a separate bank account. This way, you aren’t surprised by a large tax bill.
Mistake #4 – Trying to DIY payroll taxes to “save” money
When you have one or more employees, you have to pay payroll taxes. Payroll compliance is surprisingly complex and time-consuming.
If you try to handle your payroll taxes on your own, it will take up a significant amount of your time, which could be better spent on other aspects of your business.
It is risky. If you make mistakes when it comes to payroll taxes, you could face serious fines and penalties.
Using a payroll service like Gusto will save you a lot of time and money in the long run. Once you have employees in multiple states, you may want to switch to a service like JustWorks that will handle multi-state registrations, insurance, unemployment requirements, etc.
Mistake #5 – Moving from a LLC to a S Corp too early
One of the biggest mistakes we see people make is going to S-Corp too quickly. A S Corp can save you money if your business is highly profitable. However, if your business is brand new or has any debt, it could actually be limiting your options, including:
- A S Corp has more filing and compliance requirements than a simple LLC.
- It adds payroll compliance.
- If you have debt on the books, you could actually be limiting your deductions. In fact, if the company is not making any money, you could end up creating phantom income for yourself.
Mistake #6 – Switching from a S Corp back to a LLC improperly
If you decide an S Corp is no longer the right business structure for you, you can’t just close it and open a new LLC. By doing this, you created a new taxable event. That’s taxable at the fair market value of what your company’s worth at the time you did that. For instance, if your business is doing a million in profit and typical multiples are 5x earning, you just created a $5M tax event by closing your original S Corp.
By understanding the most common tax mistakes and taking steps to avoid them, you can ensure that your eCommerce business stays on track and avoids costly issues. This way, you can focus on growing your business and serving your customers, knowing that you are in compliance with all relevant laws and regulations.