Understanding tax as a startup eCommerce business can be very tricky, particularly if you’re operating in multiple states or countries. Even for more established companies, it can be hard to monitor constantly evolving policies.
Organizing and filing your taxes doesn’t need to be complicated though.
To keep you on your toes, making sure your business is in line with modern regulations, we’ve identified 4 tax pitfalls your eCommerce company might face. If you find yourself facing any of these issues, you’ll be able to deal with it smoothly!
Your eCommerce business will face serious issues right from the outset if your bookkeeping system is ill-organized and inaccurate.
Particularly for startup eCommerce stores, it can be chaotic trying to keep track of all your income and expenses, so getting in the habit of regularly and properly updating your books is absolutely vital.
Your records need to be pretty comprehensive so you’re prepared for tax return filing. You should be keeping all sales receipts, bank and credit card statements, expense invoices, and employee records. Everything should be streamlined for easy retrieval, so opting for accounting software to digitize all your records is a fantastic option.
In addition to keeping all your records accessible, you need to make sure you are categorizing everything correctly. Ensure that you have an understanding of how to define your expenses properly.
In terms of your employees, you need to categorize them correctly according to their status for tax purposes, whether they be a permanent member of staff on the regular payroll or a freelancer.
You’ll also need to be able to define your allowable expenses correctly. These are the expenses you incur that are absolutely essential for running your business. This includes the cost of your computer and printer, web hosting and maintenance, stock, transport, rent and utilities, insurance, and accountants.
Failing to have full and accurate financial records is the first pitfall you may fall into when it comes to organizing your taxes.
Determining Which Regulations And Customs To Follow
It can be tricky working out what tax regulations and customs you need to adhere to when you’re supplying products nationally and internationally.
Generally, your business is only obligated to pay tax in the state or country that you operate within, even if you are providing goods abroad.
In the US, states cannot collect taxes from your business unless you have nexus there, that is, you have a physical presence there, actively conducting business from that area.
After confirming who you owe tax to, there are further issues to take into account.
Concerning VAT, in the UK, for example, when your company earns over £82,000 on VAT-taxable goods in a 12 month period, you must register for VAT or you’ll face a fine. Make sure you are monitoring your income to work out if your liability changes over time.
And in terms of charging your customers VAT, you’ll need to work out the right amount to charge. In the UK, it is generally charged at 20% standard, however, some products can be charged at a reduced rate of 5% or at 0%. If it’s 0%, your customer is not obligated to pay VAT, but you must still register the sale with HMRC.
Some citizens in different countries have different preferences regarding how prices are displayed on eCommerce websites in relation to VAT. In the US, prices are displayed exclusive of tax, but in places like Australia, they want it to be all-inclusive.
Your next potential pitfall is making sure you understand your tax obligations at a governmental level as well as knowing what your target customers desire.
Paying Too Much
With all the different rules and regulations to follow in different areas, you may fall into the trap of paying taxes twice on the same income.
Countries like the UK have an extensive network of double taxation treaties to ensure that taxpayers aren’t forking out twice on the same portion of the money. Just be aware of where you are obliged to pay tax, on what, and keep an eye on your outgoings.
Another way that you may fall into the trap of paying too much is by failing to claim the appropriate deductions. You should do intensive research to see what deductions you can claim back.
Expenses like using a portion of your home as an office can be deducted, alongside any utilities and home repairs that need to pay for in order for you to carry out business properly. Insurance costs and interest paid on business accounts, as well as shipment and packaging expenses, are all tax-deductible.
Make sure you don’t pay out more than you need to, or you risk falling into this third pitfall!
Keeping Up With Regulation Changes
Once you’ve pinned down exactly what rules and regulations you need to abide by, you might fall into the trap of not keeping up-to-date with ongoing amendments to policies. Fines may follow.
It is crucial that you consult local experts to keep you informed of the taxes and tariffs in place in the country you are operating in to keep you on the right track.
The law is fluid so you may be in line currently but it could change in the blink of an eye, tripping you up.
Avoid These Pitfalls!
These 4 tax pitfalls are easy to fall into but are just as easy to avoid, as long as you equip yourself with the right knowledge.
Whether you take on all your bookkeeping alone, hire someone internally to do it, or reach out to an external accountant, you need to be aware of and understand the consequences of these potential hazards to keep your eCommerce business out of hot water.
About The Author
Emily is a writer for specialist small business accountants and tax advisers, Tax IQ, based in Edinburgh, Scotland. She regularly pens articles which demonstrate the company’s expertise in a wide range of financial matters, for the benefit of freelancers, contractors, SMEs, start-ups and limited companies alike.