Making a business of selling online doesn’t elude the tax authorities anymore.
Not in this day and age, with ecommerce worth trillions of dollars a year.
It used to be that ecommerce sellers could fly relatively under the radar with regards to tax, but as the industry grew and the revenue soared, attention turned its way. Today, 63% of shopping experiences start online, and the impact of the COVID-19 pandemic has only increased the popularity of and reliance on this method of consumption.
The radar is worth too much money now and as a result, sellers are on the hit list for taxes all over the world. And not just one type of tax, either.
Plus, with marketplaces going global and orders spanning countries and tax jurisdictions, sellers are suddenly liable to pay not just their home tax authority, but potentially all those of their customers too. That’s messy, and as it’s still relatively new and evolving, the dust hasn’t really settled yet.
Learning what is required of you today can feel pretty overwhelming.
But that’s the purpose of this guide: To give you a starting point.
This blog is a part of our Shopify accounting series. Here, we’ll introduce the main taxes that Shopify sellers need to be aware of, who they apply to, how much they’ll cost you and how to collect them. We’ll also include links to more detailed resources for a deeper dive into each, should you need it.
In this guide on Shopify taxes, part of our Shopify accounting hub:
Table of Contents
- The Shopify Taxes That Sellers Need to Pay
- Shopify Sales Tax
- What is sales tax?
- Who needs to pay sales tax?
- How much is sales tax?
- Does Shopify pay sales tax for you?
- How to set up taxes on Shopify
- Where to go next
- Shopify Income Tax
- What is income tax?
- Who needs to pay income tax?
- How much is income tax?
- The Shopify tax forms you need and how to file them
- Overseas Shopify Taxes: Shopify VAT & GST
- What Shopify international taxes are there?
- Who needs to pay these taxes?
- How much are they?
- Does Shopify charge VAT and GST?
- Where to go next
- Are Any Shopify Sellers Tax Exempt?
- Shopify Tax Apps & Automation
- Recommended tax apps for your Shopify sales tax collection:
- Shopify Tax Reporting Made Easy with A2X
- What Did You Think?
- Other Shopify Resources
Learn how to manage your Shopify accounting the right way
If you want to scale up your Shopify business, you need reliable accounting. Discover the best tools, key tax information and how to ensure that your Shopify accounting is set up for success.
The Shopify Taxes That Sellers Need to Pay
Whether you are a business owner or not, taxes are a part of daily life.
When you buy goods or services you will often pay tax, if you are a salaried employee you’ll pay tax. You’ll even pay tax if you inherit from or give money to someone else.
Shopify sellers typically need to pay attention to two tax categories: Sales tax and income tax.
Sales tax takes on various forms across the world like VAT and GST, so if you sell inside and outside of the US, you’ll need to explore your various requirements to match.
Income tax is probably familiar to you already, and your Shopify income will most likely need to be taxed this way too. This requires self-filing (unless you outsource), so it’s crucial to know what you’re doing and prepare early on.
Here we’ll give you the basics of each tax type and where to go for further resources. This information is relevant to Shopify sellers in general, but it is best to check with a professional ecommerce accountant that they apply to your unique circumstances too.
Shopify Sales Tax
Prior to 2018, sales tax wasn’t too much of a concern for ecommerce sellers.
The rules were blurry, not really upheld, and the precedent in the courts was not on the side of the states and authorities. So if states did take companies to court over sales tax collection, it wasn’t a given that they’d walk away with full pockets – that is, until Quill v. Wayfair.
In this landmark case, just three years ago, the tables were turned.
Ecommerce was recognized as a lucrative industry that should not be exempt from the same sales tax rules as physical businesses, and eligibility thresholds were put in place.
If ecommerce sellers met these revenue thresholds and qualified for economic nexus, they would need to begin collecting and remitting sales tax.
- What is sales tax?
Sales tax is what the US calls its tax placed on goods sold.
Your buyer pays sales tax on top of their order, you hold onto the tax and then need to remit it to the relevant tax authority. Because of this process, sales tax is sometimes referred to as a “pass-through” tax.
It is similar to VAT, except it is not added on at each stage of the manufacturing process like VAT. But we’ll get to that later.
- Who needs to pay sales tax?
Ecommerce sellers that qualify for economic nexus in a particular state need to pay that state sales tax.
Economic nexus is determined by yearly revenue thresholds. Once a seller meets that threshold, they are deemed eligible to pay tax.
Each US state sets its own thresholds and tax rates, and some have none at all. Some require that you pay the rate of your home state and others require you to pay the rate of your buyers’ home states.
It’s not straightforward, which is why we have a dedicated guide to it here.
- How much is sales tax?
Every US state sets its own sales tax rate.
The N.O.M.A.D. states: New Hampshire, Oregon, Montana, Alaska and Delaware, don’t collect any sales tax at all.
Sales tax rates in the US vary from 0%-9.5%+.
- Does Shopify pay sales tax for you?
No, Shopify doesn’t pay sales tax for you.
Marketplace facilitator laws were brought in to help make the collection and remittance process of sales tax automated for sellers and authorities.
For the states which have adopted these laws, marketplace facilitators like Amazon or eBay are required to collect and remit sales tax on behalf of their sellers who have economic nexus there.
Shopify, however, is not a marketplace facilitator.
So whilst you can set up your store to collect sales tax, Shopify won’t manage the remittance process for you.
- How to set up taxes on Shopify
To set up your Shopify and sales tax collection, follow these steps:
- You need to set up which countries you’re collecting in. In your Shopify account, head to Settings > Taxes.
- Select the tax region, rate, and click Save.
If you’re in the US, you can choose automatic tax settings or manually select the rates you need to collect by location, including any extra shipping taxes.
Helpfully, you can choose to show your product prices in your store with sales tax included.
For more detailed instructions on this step, check out our blog How to Collect Shopify Sales Tax.
- Where to go next
This is just the tip of the iceberg when it comes to Shopify and sales tax. We have a more thorough guide dedicated to each aspect below:
- The Ultimate Guide to Shopify Sales Tax
- How to Collect Shopify Sales Tax
Shopify Income Tax
Whether you make all your money via Shopify or not, you probably need to declare it on your income tax return.
There isn’t really a set threshold for declaring income from one source, it’s just best practice to declare anything you make to avoid issues if audited.
- What is income tax?
Income tax is a tax placed on the proceeds from money earned. For salaried employees or wages, this is taken before it is paid out. For businesses, it is calculated after tax-deductible expenses have been accounted for. But even selling old items at a garage sale counts as “income” too.
The government collects income tax to pay for the infrastructure of our countries, cities, and communities.
- Who needs to pay income tax?
Just about everyone. Very few people are exempt from paying some form of income tax – you can find who these groups are here.
- How much is income tax?
This depends entirely on how much money you make, as well as your household status, marital status and whether you have dependents.
Find more information on the 2020-2021 thresholds and rules here, but we highly recommend you speak to a specialist ecommerce accountant about your unique circumstances.
- The Shopify tax forms you need and how to file them
It is important to get professional help when it comes to filing your taxes.
Miscalculations and errors can cost you, so whilst we provide information here that should be most relevant to you, it’s critical that you get tailored advice. You can find help from a specialist ecommerce accountant here.
Typically, ecommerce sellers need the following income tax forms:
- IRS Form 1040: The form for individuals that need to file their income tax returns. Find filing instructions for this here.
- Schedule C: The form for sole proprietors to report income and losses. If you’re not operating as a sole proprietor, you may need another form. Find filing instructions for this here.
- IRS Form 1099-k: A form that Shopify is required to fill out for its sellers who make over $20,000/year or process over 200 transactions. You will receive this if you qualify and need to check the information is correct. Find filing instructions for this here.
You may be able to deduct a number of expenses from your tax return too.
Overseas Shopify Taxes: Shopify VAT & GST
With the expansion of the global market and more opportunities than ever for Shopify sellers to reach international customers, taxes overseas have caught up.
Not only have countries begun to recognize the need to tax their home sellers for ecommerce sales, but they are also after those selling into their countries from overseas too.
Like with sales tax above, sellers are protected in most places by revenue thresholds.
- What Shopify international taxes are there?
Most countries have some form of sales tax, VAT, or GST. We’ll focus here on the latter.
Value-Added Tax (VAT) can be found throughout the world, including Europe, and is added to a product at each stage of its manufacturing journey. In other words, each time value is added to the product by developing it.
Goods and Services Tax (GST) can also be found throughout the world including Canada, Australia, and New Zealand. It works similarly to VAT in that it is added at each stage of the production line.
- Who needs to pay these taxes?
If you sell enough products into countries that levy VAT or GST against ecommerce sellers, then you need to collect and remit it.
- How much are they?
Thresholds vary by country.
You will need to look into all the countries that buy from you and check how much business you have done with them in one tax year. This will give you a total revenue that you can check against their thresholds.
Fortunately, when it comes to VAT in Europe, there is now one threshold of €10,000 for every member state.
- Does Shopify charge VAT and GST?
Whilst you can set up Shopify to collect VAT and GST as checkout, it will still be sent to you to remit.
You will need to file the taxes and return them to the correct tax authority.
Beware that some countries require the product prices on your front end to include tax. The UK is one example of this. Use the Shopify resource linked below for help setting this up.
- Where to go next
Below are dedicated guides to Shopify VAT and instructions with Shopify tax settings to enable location-based collection:
- Shopify VAT
- Shopify: Location-Based Taxes
Are Any Shopify Sellers Tax Exempt?
It’s not a question of being exempt from taxes or Shopify taxes in general.
You will need to look into each tax type individually to figure out whether there are exemptions you can apply for or not.
Speak to a specialist ecommerce accountant about tax exemptions and whether you might be eligible.
Income tax exemptions no longer exist. Instead, the standard federal deduction has increased. Find out more about sales tax exemption and income tax deductions below:
Shopify Tax Apps & Automation
With the expansion of taxes into the ecommerce arena, the software to help online sellers manage their taxes has followed too.
There are Shopify tax apps and integrations which you can add to your accounting stack for automatic collection and categorization. These can also provide you with the Shopify tax documents you need, Shopify sales tax reports, and give you the most up-to-date rates as they change (which they tend to do regularly).
Start with your accounting software and A2X (which we’ll look at in more detail below). For sales tax, A2X will split out your bank deposits so that you don’t need to manually calculate the sales tax you’ve collected per transaction. This can save you a lot of time and help ensure no mistakes are made with remittance.
You can then integrate a Shopify tax app to calculate how much tax you owe each tax authority with whom you have economic nexus – i.e., you’ve met their threshold to remit tax. The apps are updated as rates change and can remind you when filing is due.
Recommended tax apps for your Shopify sales tax collection:
Find more on the Shopify ecommerce app store.
Shopify Tax Reporting Made Easy with Fiflow
We briefly mentioned above how Fiflow can help you by automatically calculating how much sales tax you have collected per transaction, but that’s not all it does. Not by a long shot.
Fiflow captures each of your Shopify settlements and splits out exactly what went into them. The fees you paid, shipping costs, returns collected, and sales tax. Each income or expense line associated with the bank deposits showing up in your accounting software is laid out for you.
These are summarized into journals which Fiflow posts to your accounting software so that your books are organized, accessible and accurate.
Fiflow also organizes your accounts via the accrual method which gives you a more dynamic view of your cash flow and better data for forecasting.
Get on top of not just your taxes but of all the money coming into and out of your business.
What Did You Think?
This blog is the final chapter of our Shopify accounting basics series. You can find plenty more resources on all things Shopify selling over on our blog.
How did we do? Did you find these articles helpful? Did we miss anything?
Please feel free to contact us with any feedback or thoughts so that we can make all our resources as engaging, and as actionable, as possible. Thank you!
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