A Guide to US Tax Planning for eCommerce Business Owners

Imagine this scenario: taxes are due next week, and you realize you haven’t updated your books in six months or set aside any money to pay your taxes. You panic and start digging through your finances, trying to come up with the money as quickly as possible. But it’s too late – the deadline has passed, and you’re hit with fines and penalties. Your business takes a financial hit, and you’re left feeling overwhelmed and stressed out.

This is just one example of why tax planning is so important for eCommerce business owners. 

By proactively managing your taxes, you can avoid costly mistakes and ensure that your business stays on track. 

If questions surrounding tax planning for an ecommerce business have left you unsure where to start, you’ve come to the right place. No matter if you’re a first-time business owner or a seasoned retailer who’s recently restructured their online business, here’s what you need to know about tax planning, including actionable tax strategies and accounting advice. 

Note: Before we dive in, this post is designed to be educational. We strongly recommend all eCommerce entrepreneurs talk to a tax accountant or tax advisor to get the best tax advice for their specific financial situation.

Why is tax planning important?

$475.9 billion. That’s how much the Internal Revenue Service (IRS) collected in business income taxes, before refunds, last year. If the sheer amount of money annually forfeited by business owners to the IRS alone is not enough to conceptualize why accurate tax planning is so important for yours, consider the following reasons. 

Tax planning is essential to minimize the tax liabilities of your business or, in layman’s terms, the amount you ultimately owe the IRS. By understanding proper tax law, such as the appropriate filing dates, types of taxable income, and potential tax deductions, you can reduce your business’ tax burden and retain more of your profit.

Similarly, thorough tax planning will help your business remain in compliance with state and federal tax regulations. Though we’ll dive into the specifics below, many elements of tax planning (such as remitting the appropriate sales tax) are a must to avoid costly penalties and remain in good standing with tax authorities. 

Beyond the legal nature of tax planning, adequate knowledge of how tax season will impact your ecommerce business is also necessary to enhance your cash flow. By forecasting how much you will owe in business taxes, you can better allocate resources, invest back into your business, and plan for the future more confidently. 

Key 2024 tax dates

As mentioned, important tax dates can vary depending on your ecommerce business’ structure. Take a look at key 2024 tax dates to keep in mind, and we’ll explain the differences between each business structure shortly. 

• January 31 – 1099 filings: Form 1099, also called an information return, is a document that business owners must issue to vendors and independent contractors who were paid over $600 in non-employment income during the calendar year. 
• March 15 – S Corp filing: S corporations must file Form 1120-S to report their business income, gains, losses, deductions, and credits for the calendar year, then provide each shareholder with a Schedule K-1 form for their personal income taxes.
• April 15 – Tax Day: Business owners, partners, and shareholders must file and pay personal and business taxes in full by Tax Day, or file Form 4868 by this date to request an extension. A payment plan can be established after this date as well. 
• October 15 – Extended Tax Day: Ecommerce business owners that filed Form 4868 for an automatic extension to pay 2024 taxes must file their tax return and pay any tax, interest, or penalties by this date to remain in good standing with the IRS. 

Federal and state income taxes

As you navigate ecommerce tax planning, you must understand the nuances of federal and state income taxes. Like the names suggest, federal income taxes are collected by the federal government, whereas state income taxes are collected by the tax authority in the state where the individual taxpayer resides and earns income.

Federal income tax rates are based on each taxpayer’s income and filing status, no matter where they reside or earn income, whereas state income tax rates vary by location. So, while federal income tax rates apply to all taxpayers, an individual taxpayer’s total tax liability will vary depending on their state of residence. 

Here’s a more in-depth look at federal and state income taxes for ecommerce business owners. 

Types of taxable income

According to the IRS, ‘income’ refers to compensation received in the form of money, property, or services. The IRS divides income into two buckets, nontaxable income (like life insurance payouts and inheritances) and taxable income. As a business owner, most of your income likely belongs under the taxable income category.

Taxable income encompasses earned and unearned income. Earned income is received from actively working for your business and includes commissions, fees, fringe benefits, salaries, stock options, and wages. Unearned income includes canceled debts, government benefits (like disability), lottery winnings, and strike benefits. 

Taxable income also encompasses earnings received from dividends, interest payments, and appreciated assets that were sold during the year. When filing your personal and business taxes for 2024, any business income from your ecommerce operation should be considered and appropriately filed as earned income.

Federal income tax

Every business owner needs to file a federal income tax return. Federal income tax is collected by the Internal Revenue Service based on the annual earnings of individual taxpayers, corporations, trusts, and other legal entities. It applies to all taxable income from a calendar year, including both earned and unearned income that can range from wages and bonuses to canceled debts.

For single taxpayers, federal income tax rates begin at 10% for annual incomes of $11,600 or less. For married couples filing jointly, federal income tax rates begin at 10% for annual incomes of $23,300 or less. Federal income tax rates can reach as high as 37% and will kick in at specific thresholds referred to as tax brackets. 

2024 Tax brackets

Tax brackets are how the federal government devises income tax rates for individual taxpayers. Each bracket represents a cutoff value for taxable income, where income higher than a certain value is taxed at a higher rate. These brackets are subject to annual adjustments, but here’s what the IRS reports for 2024 tax brackets: 

Tax rate	For single taxpayers earning…	For married couples filing jointly…
10%	Incomes of $11,600 or less	Incomes of $23,200 or less
12%	Incomes over $11,600	Incomes over $23,200
22%	Incomes over $47,150	Incomes over $94,300
24%	Incomes over $100,525	Incomes over $201,050
32%	Incomes over $191,950	Incomes over $383,900
35%	Incomes over $243,725	Incomes over $487,450
37%	Incomes over​​ $609,350	Incomes over $731,200

* Note: Taxpayers can view previous 2023 tax brackets here.

State income tax

While every taxpayer in America is subject to the same federal income tax brackets, state income taxes vary by location. Each state has been given authority by the federal government to create its own taxation system. These systems have been categorized as flat income tax rates, graduated tax rates, and no income tax rates.

Flat income tax, often referred to as a fair tax, applies the same income tax rate to every taxpayer’s annual earnings, no matter how high or how low. Ten states have a flat income tax, including Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, and Utah. 

Graduated income tax has a similar framework as the federal government’s in that individual taxpayer income is taxed in brackets that increase in accordance with each payer’s annual earnings. There are 32 states with graduated income tax rates, including California, Hawaii, New York, North Dakota, and Pennsylvania. 

There are eight states with no state income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — which means these states do not impose an income tax at all. New Hampshire currently does not impose taxes on earned wages and will phase out taxes on unearned income by 2027. 

Though the potential for avoiding state income tax is promising, it’s important to bear in mind that these states often impose higher sales and property taxes on average to counterbalance a lack of state income tax.

Tax deductions and credits for businesses

All this talk about tax liabilities and taxable income can make it seem like there’s no reprieve for ecommerce business owners when tax planning. Fortunately, that’s where tax deductions and tax credits come into play. 

A tax deduction is an amount you subtract from your gross annual income at the time of filing so you don’t pay taxes on it. In other words, deductions reduce the amount of income that’s subject to tax. A tax credit is an amount you subtract directly from your tax liability to reduce the amount of 2024 taxes you owe to the IRS.

While tax deductions reduce how much of your taxable income is subject to tax, tax credits can lower your tax liability or even give you a refund if you don’t owe any taxes. Here’s a better idea of how to categorize the two. 

Standard vs. itemized deductions

All taxpayers have the option to claim standard or itemized deductions to reduce their amount of taxable income. A standard deduction reduces a taxpayer’s taxable income by a fixed amount, whereas an itemized deduction reduces a taxpayer’s taxable income by the total cost of their individual eligible expenses. 

Taxpayers can claim whichever deduction reduces their taxable income the most, but cannot claim both.

To determine which deduction is best for you, calculate the total of your annual eligible expenses (which we’ll detail next) and compare that number to the standard deduction amount for your filing status. If your itemized deductions are greater than the standard deduction amount for your status, opt for the itemized deduction.

The standard deduction amount for tax year 2024 will rise to $14,600 for single taxpayers and married individuals filing separately, as per recent tax inflation adjustments. For married couples filing jointly, the standard deduction for tax year 2024 will increase to $29,200. Keep these figures in mind while tax planning. 

Common tax deductions

Standard deductions are the most common by far. However, the IRS lists a variety of personal and business expenses that can be applied as itemized deductions. On the personal side, the most common tax deductions include student loan interest (up to $2,500) and charitable donations (up to 60% of adjusted gross income).

On the business side, ecommerce owners can claim the energy efficient commercial buildings deduction, which reduces taxable income by a maximum of $1.00 per square foot for buildings with 50% energy savings. Several eligible business expenses could be included as itemized tax deductions, such as: 

• Shipping costs (subscriptions for postage meters and delivery charges)
• Internet, VoIP, or video conferencing services
• Ecommerce website domain and hosting
• Independent contractors and vendors 
• Inventory storage or warehouse costs
• Business subscriptions and software
• Plugins, apps, and themes 
• Coworking spaces 
• Business insurance
• Auto and travel expenses
• Business credit card interest and bank fees
• Business meals and entertainment (50% of all costs)
• Home office ($5 per square foot, up to 300 square feet)

Likewise, if you reside in an area with state or local income tax, you can claim that amount as an itemized deduction. Deductible tax amounts range from $10,000 maximum deductions for individual taxpayers and married taxpayers filing jointly, and $5,000 maximum deductions for married taxpayers filing separately. 

Tax credits and how they work

As per the IRS, a tax credit is a dollar-for-dollar amount that taxpayers can claim on their federal tax return to reduce the amount of income tax they owe. They apply directly to a payer’s tax liability. Eligible taxpayers use tax credits to reduce the amount of tax liability owed to the IRS or, potentially, receive money from the IRS. 

Unlike tax deductions, some tax credits are refundable. This means that if a taxpayer’s total tax liability is less than the amount of a refundable credit, that individual will receive the difference in a cash refund. 

There are various personal tax credits and business tax credits offered by the IRS for business owners. On the personal tax credit side, common credits include the Child Tax Credit ($3,600 for each child under age 6 and $3,000 for each child ages 6 to 17) and American Opportunity Tax Credit ($2,500 per eligible student). 

Common tax credits for businesses include: 

• Work Opportunity Tax Credit (40% of up to $6,000 eligible employee wages)
• Employee Retention Credit (up to $28,000 per year, per employee)
• Employer-Provided Child Care Credit (up to $150,000 per year)
• Clean Vehicle Credits (up to $7,500 per year)

Retirement planning and taxes

As an ecommerce business owner, your primary objective is to drive profit for your retail operation. However, it’s also essential to care for yourself and your future — and this is where retirement planning and tax planning coincide. By contributing to retirement planning, you may even save on your taxes. Here’s how:

Many business owners pay into tax-advantaged retirement accounts, which include individual retirement accounts (IRAs) and 401(k) accounts. Both IRAs and 401(k) accounts allow taxpayers to invest money for their retirement without being taxed on their amount as it grows, so long as the money remains in the account.

The primary difference between IRAs and 401(k)s is that the former are opened by individuals through a broker or bank, whereas the latter are offered through employers that can choose to match employees’ contributions. If you’re your own boss, you can opt for a one-participant 401(k) or solo-401(k) as well. 

Other taxes ecommerce entrepreneurs need to know about 

Beyond personal and business taxes, there are a few other tax types to remain mindful of while tax planning. Take a look at how capital gains tax, sales tax, and payroll taxes can influence your 2024 tax planning. 

Capital gains tax 

Capital gains tax applies to the profit earned from the sale of an asset or investment. This type of tax applies to assets like cryptocurrency, bonds, stocks, and tangible investments like cars and real estate. When a taxpayer sells an asset, the profit is considered taxable income. Capital gains tax is applied to the profit progressively.

This means that profit is taxed based on a taxpayer’s filing status, the total amount of the sale, and how long the asset was owned before selling. Profit made on assets owned for less than a year is short-term capital gains, while profit made on assets owned for longer than a year is considered long-term capital gains. 

The short-term capital gains tax rate is determined by each taxpayer’s federal income tax bracket. The long-term capital gains tax rates are 0%, 15%, or 20% of the profit, depending on each taxpayer’s annual income. So, the sale of $5,000 worth of stock could incur $0, $750, or $1,000 of long-term capital gains tax.

Sales tax

By now, you’ve likely learned that your ecommerce business requires a seller’s permit for every state you have sales tax nexus in. With each permit you receive, you commit to filing a sales tax return and paying any owed sales tax in each respective state or risk incurring past-due sales tax, interest, and costly penalties per state.

Sales tax filing requirements vary by state, though the frequency of reporting depends on your business’ sales volume. For instance, you’d file quarterly if your quarterly tax liability is consistently less than $300,000, and you’d file monthly if your quarterly tax liability is consistently more than $300,000 in New York State. 

Bear in mind, you are still required to submit a sales tax return, even if you did not collect sales tax within a specific state that you’re permitted in within a filing period. You may file the return as zero to indicate as such. 

Payroll taxes

Payroll taxes, including federal income tax, Social Security and Medicaid (FICA), and Federal Unemployment Tax Act (FUTA) taxes, are a tax that employers must withhold from employee wages and remit to the federal government on their behalf. These taxes are not to be confused with payments made to independent vendors.

If your ecommerce business is structured as an S corp, a C corp, or a partnership, you must pay payroll taxes for yourself and your employees. If your business is structured as a sole proprietorship, with you as the lone owner, you do not need to pay payroll tax, since you are not considered an employee of your own business.

Employers who withhold payroll taxes must file Form 941, Employer’s Quarterly Federal Tax Return, each quarter. These employers must also complete Form W-2, Wage and Tax Statement and Form W-3, Transmittal of Wage and Tax Statements by January 31 to report tips and other compensation paid to employees annually.

As a business owner, some of the key things you need to know about your responsibilities when it comes to payroll taxes include:

• How much to withhold: You will need to determine the amount of payroll taxes to withhold from your employees’ paychecks based on their wages or salary and their tax filing status.
  
• When to remit payroll taxes: You will need to remit payroll taxes to the government on a regular basis, typically monthly or quarterly. You will need to file a return and pay the taxes owed by the due date to avoid penalties.
  
• What to report: In addition to paying the payroll taxes owed, you will also need to report certain information to the government, such as the wages paid to your employees and the taxes withheld. This information is usually reported on a W-2 form.
  

Because payroll tax laws vary from state to state and the penalties for screwing it up are high, we recommend using a payroll company like Gusto or JustWorks to take care of this for you.  

What you need to know about U.S. business structures

The topic of business structures has frequently emerged throughout this tax planning guide, and for good reason. Ecommerce business owners can choose to structure their operations in several ways depending on their business size, growth potential, and (more importantly) how they want their income to be taxed. 

When it comes to setting up a company in the US, there are three main company structures: LLCs, S Corps, and C Corps. 

However, the correct legal structure from day one may not be your correct legal structure in year five. So it has to be reviewed every couple of years to see if your structure is appropriate for what your goals are. 

Not to mention, there is no one-size-fits-all answer for eCommerce businesses. Choosing the right entity structure (LLC, S Corp, C Corp) can significantly impact tax obligations and business operations. The structure affects everything from liability protection to tax treatment and should align with long-term business goals. For instance, you also need to consider additional factors like if you have third-party financing, have multiple shareholders, if you have any founders or shareholders outside the US, and whether you are looking to sell the company someday. That’s why it is important to talk with a tax professional and a lawyer before setting up your company structure.  

Here’s what you need to know about U.S. business structures while tax planning for your ecommerce store. 

LLC

A limited liability company (LLC) is a business structure designed to protect an owner’s personal assets from business debts and liabilities. As the simplest business structure, an LLC can range in size from a sole proprietor who works with independent contractors to an ecommerce operation with dozens of employees.

Any business income derived through an LLC will be passed to the owner of the company as income on their personal tax returns. So, for example, if your ecommerce LLC earned $100,000 in business income and you own 75% of the business, you would report $75,000 as taxable income on your personal 2024 tax return. 

However, unless you opt to compensate yourself via recurring payroll, you will not only pay income tax on your personal income but also another 15% in Social Security and Medicare (FICA) taxes. Often referred to as “self-employment tax,” this amount represents double what a traditional employer would remit from payroll.

Pros

• LLC owners can shield their personal assets from debts or lawsuits incurred by the company.
• LLC owners file taxes separately, which could save money depending on business profits, available deductions, and potential credits.
• LLC owners are responsible for their own business decisions, without a board of directors or shareholders dictating business growth. 

Cons

• LLC owners pay taxes on all net profits from their business, which could be costly depending on sales performance. 
• LLC owners are subject to an additional 15% FICA taxes when filing personal taxes. 
• Each state has varying rules and fee structures related to establishing and maintaining an LLC, which could incur financial and reputational penalties when not followed correctly. 

Who should use an LLC?

An LLC is best suited for any individual just launching a business or currently operating an ecommerce storefront as a sole proprietor. LLCs can be used to own and operate almost any type of business, including physical and online retail, and are highly beneficial for those concerned with limiting their personal liability. 

S Corp

S Corporations get their name from Subchapter S of the Internal Revenue Code (IRC), which establishes entities that elect to pass taxable income, losses, credits, and deductions to business shareholders as a “pass-through entity.” Taxable revenue “passes through” directly to shareholders as a dividend. 

Because taxable income from the business passes to individual taxpayers, the S Corp itself can avoid double-taxation by not paying federal taxes. Instead, the S Corp pays up to 13.3% state and local income taxes, and owners themselves then pay between 10% and 39.6% for federal income taxes on their dividends. 

One catch here is that the active owner of S Corps must also pay themselves a “reasonable” W2 wage, which is also subject to FICA taxes. The amount left over after FICA taxes have been remitted to the IRS from the W2 wage is considered the FICA-free dividend, which avoids another round of federal income taxes. 

Pros

• S Corp owners and shareholders can avoid double-taxation by eliminating federal taxes on the business and instead paying federal personal income tax. 
• The 2017 Tax Cuts and Jobs Act (TCJA) allows S Corp shareholders to deduct up to 20% of Qualified Business Income (QBI) on their personal taxes, considerably reducing personal tax liability.
• S Corps also include liability protections to shield owners’ and shareholders’ personal property from debt collections or lawsuits incurred by the business. 

Cons

• S Corps can only have a maximum of 100 shareholders, which might be controversial as a business grows. 
• All shareholders in an S Corp receive voting rights, which can dilute control for the original business owner.
• Owners in an S Corp must pay themselves a reasonable W2 wage, which the IRS will analyze to gauge whether the amount is truly “reasonable” (i.e. not the majority of business profits). 

When to switch to an S Corp?

Like LLCs, S Corps are popular among small businesses and sole proprietors, especially for their liability protections. However, it’s wise to switch to an S Corp once your profits begin to reach $100,000 per month to avoid costly self-employment taxes and reduce how much you’ll owe through available QBI tax deductions. 

C Corp

C Corporations get their name from Subchapter C of the Internal Revenue Code (IRC), which establishes a business as an independent legal entity owned by unlimited shareholders with limitless growth potential. This growth potential comes from stock sales, which appeals to investors and helps advance large retail operations.

A C Corp is structured similarly to an S Corp in that business owners are required to pay themselves a reasonable W2 wage, and the remaining profit is considered a dividend. However, a C Corp can also elect to retain its earnings rather than pass along the dividend to the owners of the company, thus retaining the profit. 

In the event a dividend is issued from a C Corp, it is taxed at the personal level as capital gains, not business income, allowing the amount to be taxed at a lower rate. However, this amount is subject to double-taxation, first at the corporate level at 21%, and then again at the personal level at the capital gain rate of 15% or 20%. 

Pros

• C Corps enable limitless growth through stock sales, which is essential for ecommerce businesses that want to go public or attract investors.
• C Corps allow business owners to raise capital for their operations without having to give investors voting rights, retaining control over business decisions.
• C Corps can retain dividends as profit to scale ultimate business growth. 

Cons

• C Corps are subject to double-taxation, which can limit ultimate personal profit.
• C Corps often incur higher operating costs due to their larger size, such as payroll expenses, insurance benefits, and legal fees. 
• C Corps are subject to stricter regulations and reporting responsibilities, such as financial disclosures and routine board meetings. 

Who should use a C Corp?

A C Corp is best suited for ecommerce businesses with unbridled growth that are looking to go public. Only a C Corp can scale through stock sales, helping to gain investors and enter new markets. However, because C Corps are subject to double-taxation, you should only take this step if business is truly thriving month after month.

Partnerships

As the name implies, a partnership is a business structure in which two or more individuals agree to operate a company as co-owners, though there is no limit on how many partners can belong to a partnership. Partners in this structure can retain any share of ownership, so long as the total percentage equals 100%. 

Unlike corporations, partners are outright business owners, not shareholders. The difference in how partnerships are owned impacts how these businesses are taxed. Like LLC owners, partners in a partnership are considered self-employed for taxation purposes and will pay self-employment tax on all taxable income. 

However, it’s essential to bear in mind that partners in a partnership are not paid via W2 wages or regular salary. Instead, partners earn distributions of the business profits as dividends like corporations. The amount of dividends earned per partner varies depending on the verbiage explained in the partnership agreement. 

Pros

• Partners can retain whichever percentage of the business they choose.
• Partnership income is earned as dividends and is not subject to double-taxation. 
• Partnerships offer liability protections that safeguard owners’ personal assets from business debt and lawsuits. 

Cons

• There is no maximum for the number of partners, meaning a partnership could dilute personal business control.  
• Partners must pay self-employment tax on all taxable income.
• Partners earn dividends as expressed by the partnership agreement, which may not be as consistent as W2 wages. 

Who should use a Partnership?

A partnership is ideal for ecommerce business owners who may not have the time or resources to scale their operations alone, so they’re seeking a partner with additional expertise. A partnership can operate similarly to an LLC, however, it allows you to split your business equally (or however you see fit) with another seller. 

Pro Tip: Depending on your business structure, there are also several key considerations around how you pay yourself. For instance, you need to take “a reasonable salary” if you have a S Corp or C Corp.  And if you are planning on taking distributions or dividends out the business, there also tax considerations. We recommend speaking with your tax accountant to go through your specific situation.  

<add social clip about salaries vs dividends here

https://drive.google.com/file/d/13IgAV3StigYDLKLNUX3ab_4l9idYHhNI/view?usp=sharing > 

Why you should hire a tax accountant to file your taxes

At this point, it should be clear that tax planning takes a lot of time and energy; but, most importantly, it requires a ton of innate knowledge on tax law. So, it’s wise to hire a tax accountant to file your 2024 taxes. A tax accountant is well-versed in complex Internal Revenue Code to optimize your personal and business taxes.

For instance, an accountant is aware of the potential tax deductions and tax credits that could apply to your ecommerce business. They can help gather and total your itemized deductions, compare that amount to the potential standardized deduction for your filing status, and choose the option that saves you the most money.

Likewise, a tax accountant can save you significant time come tax season — time you likely do not have available as you operate an entire business. By speeding up the process of tax planning and filing, as well as remaining ahead of key filing dates, a tax accountant can help your business avoid costly overdue penalties.

How to avoid an unpleasant surprise at tax time

With all the effort that goes into tax planning for an ecommerce business, the last thing you want is an unpleasant surprise at tax time. 

The best way to avoid this common mishap is to use cloud accounting software like Xero or QuickBooks and being proactive about your bookkeeping throughout the year. 

Consider these steps to file personal and business taxes with confidence: 

• Remain proactive, taking note of potential business expense deductions or tax credits that can benefit you. 
• Keep your bookkeeping up to date throughout the year, making sure to categorize your liabilities and income correctly. 
• Use cloud accounting software like Xero or Quickbooks to simplify your calculations at the end of the year. 
• Maintain receipts of all business expenses, from website hosting costs to independent contractor payments, to claim on your taxes. 
• Work with a bookkeeper to ensure your financial records are clean, easy to follow, and compliant with state and federal law.
• Separate business and personal taxes to clearly identify taxable income and monitor personal taxes for potential tax credits. 
• Incorporate your business as soon as you have sales to avoid hefty self-employment tax and begin scaling your operations. 
• Pay your quarterly estimated taxes to not be surprised by the lump sum at the end of the year (and potentially get a refund if you overpaid). 
• Set aside tax money each month in a separate bank account throughout the year that can be ready to pay the IRS on Tax Day. 
• Communicate early (and often) with your accountant and/or bookkeeper to maximize tax planning and remain ahead of key filing dates. 

6 common tax planning mistakes to avoid

What’s the best way to avoid an unpleasant surprise at tax time? Understanding the most common mistakes other business owners make, then doing everything in your and your tax accountant’s power to steer clear of them completely. 

Here are the most common tax planning mistakes we see, and how to prevent them in your business. 

1. Not paying your taxes on time 

The easiest way to avoid unnecessary tax penalties and fines is to pay your estimated quarterly taxes and file your taxes on time. 

If you are running behind, you can file a 6-month tax extension on/or before April 15th.  This will give your tax accountant more time and doesn’t lead to an increased audit risk. However, this doesn’t give you a free pass to avoid paying taxes for 6 more months. You’ll still need to make your estimated tax payment to avoid incurring additional fines and penalties. 

Pro Tip: With a cash-intensive business and poor planning, it can be easy to use any free cash flow to pay your team or buy more inventory. Then, when tax time rolls around, you are scrambling to figure out how much you owe and how you are going to pay it.  If you can’t find enough money to pay your tax bill, you are going to end up on a payment plan and paying penalties. 

A simple way to ensure that you have enough money to pay taxes on time is to create a separate bank account just for tax money each month. You may also want to use a cash flow management strategy, like Profit First, too. 

2. Not knowing your revenue and profit numbers

It’s nearly impossible to report the correct taxable income or pay the correct business and personal taxes if you don’t know your revenue and profit numbers. 

Also, if there is a big discrepancy between your numbers in Xero and your Amazon 1099k figures, for instance, you are also increasing your chance of being audited by the IRS. An audit creates additional stress, anxiety, and fees for your accountant. 

A simple way to fix this is to have your accountant or bookkeeper reconcile your accounts each month. 

3. Messy bookkeeping receipts

It’s difficult to remain in compliance with the proper tax authorities if you cannot conceptualize your own bookkeeping receipts. Your ecommerce business books need to remain organized by creating clear, dated columns for assets, liabilities, shareholder equity, and other finances. 

4. Not tracking expenses

A thorough understanding of your business and personal expenses is critical to receiving the most deductions on your return. Without tracking your complete expenses, you may opt for a standardized deduction that’s far lower than your potential itemized deduction. Monitor all expenses with software like Xero or Quickbooks.

5. Not reconciling your bank and credit card statements

Like your business inventory, bank and credit card statements could skew your assets and liabilities when not reconciled. Reconciliation statements confirm that the proper payments have been processed and that cash has been deposited into your bank account. At Bean Ninjas, we refer to this process as balance sheet reviews. 

6. Not keeping track of inventory

Speaking of bookkeeping and expenses, inventory is a key element of business expenditures that can be factored into your 2024 taxes. Inventory is listed on your balance sheet as assets until it is sold. By not keeping track of inventory, your business may report an incorrect inventory amount that skews your company assets. 

To effectively track and manage your inventory and tax deductions, it is important to switch to accrual accounting and implement detailed inventory reporting on a regular basis (such as weekly or monthly). This will allow you to accurately determine the amount of inventory you have bought, what has been sold (recognized revenue), and any inventory write-offs (tax deductions).

Key Takeaways

Effective tax planning is essential for ecommerce business owners in the United States, not only to minimize a company’s tax liability but to also remain in good standing with the appropriate tax authorities.

Ecommerce business owners must abide by several key filing dates and submit all tax income to federal income taxes and state income taxes, when applicable.

However, if you are proactive about communicating with your bookkeeping firm, like Bean Ninjas, and a tax accountant, like Blueprint Tax Partners, they can help you with tax planning, take advantage of all deductible expenses, and apply applicable tax credits. This means a more simple tax filing experience at tax time. 

This article waa co-written by Wayne Richard, of Bean Ninjas, and Chad Huebsch, of Blueprint Tax Partners.