Business formations grew by over 40% in 2023. People are looking for ways to supplement income and leave jobs they don’t like.
One of the easiest businesses to start is a dropshipping business. As with any business, there are legal and tax issues that you have to learn about.
You need a guide to dropshipping accounting to help you understand all of the tax issues that you face. Read on as we go over the top accounting issues to know when you start a dropshipping business.
1. Legal Entity and Taxes
When you first start your business, you’ll likely start it as a sole proprietor or single-member LLC. You’ll file your business taxes as an individual and pay self-employment taxes, which amount to 15.3% of your profit.
You could be an LLC and choose to file taxes as an S-Corp. With this structure, you may be able to lower your tax liability by taking a salary and cash distribution. That usually makes sense when your revenue hits a certain level.
Always get advice from a tax professional before you make any decisions about the legal entity of your dropshipping business.
2. Sales Taxes
Do you think you don’t have to collect sales taxes because you’re an internet company? That’s not necessarily true.
To understand sales tax laws, you need to know what a nexus is. Nexus is the relationship that a seller has to a state. For instance, if you operate your business out of Washington State, you have sales tax nexus there.
You are required to collect and pay sales taxes on sales made within Washington.
Most state laws require you to collect sales taxes if your sales exceed a certain threshold, such as $100,000 in sales or more than 200 transactions.
You could have more than 200 transactions to customers in New Jersey as well as customers in Washington. You’d have to collect and pay sales taxes in both states.
This is the most important aspect of dropshipping accounting. Any mistakes could cost you fines and penalties.
3. Payroll Taxes
Eventually, you’re going to grow and have employees. You not only have to earn enough to pay salaries, but you need to pay payroll taxes as well.
Remember that 15.3% that you have to pay as a self-employed person? That’s for FICA programs like Social Security and Medicare.
Every employer has to withhold 7.65% of every employee’s check and send that money to the IRS. Employers are responsible for paying 7.65% as well, which brings the total to 15.3%.
You may have to pay state payroll taxes as well.
A Guide to Dropshipping Accounting
This guide to dropshipping shows you that there’s a lot more to running a business than you think. You need to understand which taxes you have to pay.
You can’t claim ignorance and hope that you can get out of paying fines. The best thing to do is to hire a knowledgeable CPA who understands what a dropshipping business does.
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