Doing your taxes as an ecommerce business can be quite the undertaking, and the last thing anyone wants is an unpleasant surprise bill at tax time.
The secret to avoiding an unplanned tax expense lies in having all your documents organized and strategies in place to optimize your tax position. In this post, we’re sharing a tax planning checklist you can use to do this.
Note: Before we dive in, this post is designed to be educational. We strongly recommend all eCommerce entrepreneurs talk to a tax accountant to get the best tax advice for their specific financial situation.
Article Contents
Questions to ask yourself ahead of tax season
Here are some questions you should ask yourself.
- Have I accurately tracked and categorized all my income and expenses?
- Am I taking advantage of all eligible tax deductions and credits, including home office, mileage, and depreciation?
- Do I have all of my receipts and documentation for my deductions?
- Have I properly accounted for inventory and cost of goods sold?
- Am I using the correct accounting method (cash vs. accrual)? At Bean Ninjas, we recommend accrual accounting for most ecommerce businesses.
- Have I complied with sales tax requirements in all applicable jurisdictions?
- Am I up to date with quarterly estimated tax payments?
- Do I understand the tax implications of international sales?
- Have I maximized my retirement contributions and any applicable HSA contributions for tax benefits?
- Have I issued 1099s to any contractors I’ve worked with on or before January 31st?
- Did I ask my accountant about any tax law changes and the impact it might have on my business this year?
- Is my business structure (sole proprietorship, LLC, S Corp, Corporation) still the best choice for tax purposes?
Best practices for preparing for tax time
Filing personal and business taxes can be a daunting task, but with the right preparation and knowledge, it’s a manageable process.
Here are some best practices to ensure you’re well-prepared for tax season:
- Plan ahead. Tax time in the US is the same time every day. By communicating with your bookkeeper and accountant throughout the year, keeping your books up-to-date, and having all of your financial documents in one place can go a long way in taking advantage of any tax credits and deductions and avoiding a last-minute fire drill.
- Keep your books clean. Partnering with a niche ecommerce specialist firm, like Bean Ninjas, can help you ensure your financial records are clean, comprehensive, and compliant. Not to mention, this can also help you save money by finding and claiming additional tax credits and deductions.
- Document your expenses. Keep all of your receipts for any business expenses, from website hosting to payments to independent contractors. This documentation is crucial for substantiating claims on your tax returns.
- Pay quarterly estimated taxes on time. Stay on top of your quarterly estimated taxes to avoid year-end surprises. Paying quarterly can also lead to refunds for overpayment. In fact, it can help to set up a separate bank account just for taxes. Then, every month automatically transfer tax money to their account.
- Maintain open lines of communication with your accountant and/or bookkeeper. Early and frequent discussions can maximize tax planning efficiency and keep you ahead of important deadlines.
- Review your prior year’s tax return. This helps you gauge not only your income and expenses, but avoid repeating the same mistakes that you may have made in the past.
Avoid these tax pitfalls
Here are the most common tax planning mistakes we see and how to prevent them in your business.
Tax penalties and fines
The simplest strategy to dodge fines and penalties is to pay your estimated quarterly taxes and sales taxes on time.
If you are falling behind on your bookkeeping, consider applying for a 6-month extension by March 15th for SCorps and April 15th for individuals and LLCs. This buys you and your accountant extra time without elevating your audit risk.
However, to avoid late fees, you still need to pay your estimated taxes by April 15th.
Not knowing your numbers
In order to avoid underpaying or overpaying, you need to know your numbers – especially review and profit – inside and out.
Not to mention, a mismatch between your cloud accounting software, like Xero or QuickBooks, and, say, your Amazon 1099k can flag you for an IRS audit. Regular account reconciliation by your bookkeeper or accountant can keep your figures in check.
Pro Tip: In ecommerce businesses where cash flow is king, it’s tempting to reallocate funds meant for taxes toward payroll or inventory. This often leads to a scramble at tax time to pay your tax bill or risk getting set up on a payment plan or having the IRS garnish your wages. You can avoid this by setting aside tax money monthly in a dedicated bank account. Embracing a cash management strategy, like Profit First, can help you figure out how much money to sock away each month.
Messy bookkeeping
When you are busy doing all of the things required to run a business, an important but usually not urgent task, like bookkeeping, can quickly fall to the bottom of your to-do list. Before you know it, it is tax time, and you’re 6+ months behind on your books.
This means that if you want to take advantage of every possible tax credit or deduction, you are looking at quite a bit of extra work and likely paying a clean-up fee to an ecommerce bookkeeper.
Not reconciling your accounts
Your bank and credit card statements mirror your business’s financial health. Failing to reconcile these accounts on a monthly basis can misrepresent your financial position.
At Bean Ninjas, we call this process “balance sheet reviews.” It is our go-to method for ensuring everything checks out.
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Incorrect inventory tracking
Inventory management goes beyond logistics. There are also real tax implications. That’s because incorrect inventory tracking can distort your balance sheet.
Transitioning to accrual accounting and maintaining regular, detailed inventory reports helps to accurately track purchases, sales, and write-offs for tax purposes.
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For US ecommerce entrepreneurs in the US, mastering tax planning is crucial for maintaining compliance and staying on the right side of the law.
Adhering to key filing deadlines and accurately reporting income for both federal and state taxes is a must.
Being proactive about tax planning can reduce some of the stress and uncertainty related to tax time. By engaging with a niche ecommerce accounting team, like Bean Ninjas, and a skilled tax accountant, like Blueprint Tax Partners, you can ensure that you’re making the most of deductible expenses and leveraging tax credits to your advantage.
