Top 5 Bookkeeping and Tax Tips for E-commerce Companies
Updated on: April 21, 2021
Running an e-commerce business is exciting, stressful, and rewarding all at the same time.
When starting and running your business, you often wear all the hats, including accounting and bookkeeping. Business planning and tax planning begin at the beginning of the year and continue throughout the year.
Let’s explore some ways to keep you on track financially, remain compliant, and maximize tax savings.
1. Business Bank Account and Credit Card:
A separate bank account provides immediate insight into the flow of dollars into and out of your business. And, even if you are still personally funding the business (and the inventory costs), you can transfer the money you are using to fund the growth directly into the Business Account. This allows you to track how much you are loaning the business or how much equity you are providing into the company.
The best practice is to open a Business Bank Account first. Since there is no expense for opening the account, other than a potential account fee at the end of the month, it makes good business sense. Keep in mind, you will need to have your incorporation documents and EIN in order to open your account.
Establishing your Business Bank Account provides the bank with some needed information to open a business credit card and, when you are ready, the bank will have insights necessary for funding a loan. Additionally, a separate Business Bank Account and Credit Card can integrate seamlessly into your accounting software to streamline your bookkeeping and make it possible to track profitability.
It is best to choose one of the main banks, Wells Fargo, Chase, or Bank of America as they link with best in class accounting software such as Xero or QBO.
2. Bookkeeping, Gateway to Tax Savings:
Understanding your financials is one of the keys to growing your e-commerce business profitably.
By tracking your Gross Profit (Revenue – Cost of Goods Sold) you have immediate insight into whether or not your pricing makes sense and your profit margin is where you need it to be.
Through tracking your Net Income (Gross Profit – Operating Expenses), you can watch for trends where your Operating Expenses (payroll, rent, utilities, banking fees, etc) are increasing at a greater rate (or lower rate) than sales growth. These types of insights allow you to make decisions much sooner to drive your business growth intentionally.
Keeping your bookkeeping up-to-date is not only important for financial peace of mind, but it is also very important for tax time and tax savings. If you have a lot of profit at the end of the year, a tax savings tip is to pay for inventory before the year ends.
Your tax team or CPA will use your Income Statement and Balance Sheet to properly file your business’s taxes timely and accurately.
3. Track and File your Sales Tax:
You may be required to pay sales tax depending on your sales in that state.
The great news is that some e-commerce companies, like Shopify and Amazon, offer sales tax reporting by state. Additionally, there are companies like TaxJar, whose sole focus is on the ever-changing requirements of the states, keeping your company compliant, and filing the appropriate Sales Tax Reports by state.
It is critical to understand your sales by state and to remain compliant. The fines and legal ramifications of not doing so can be devastating.
4. Understanding your 1099-Ks:
When you have sales greater than $20,000 and more than 200 transactions, your Payment Processor(s) will issue a 1099-K.
1099-K’s report GROSS income received from your customers. However, when you receive the money into the bank, it is a NET amount (net of credit card processing fees), so your Revenue (Sales) received into your bank from the processor may not equal the 1099-K.
It is very important that you reconcile the income received in the bank, usually booked to “Sales” on your Income Statement, with the amount on the 1099-K. This often requires you to “gross up” your revenue to match the 1099-K (especially since the 1099-K amount is reported to the IRS). A different amount on your tax return may result in an IRS letter.
Here’s an example:
Let’s say your revenue into the bank is $100,000 from Stripe, but your 1099-K from Stripe is for $103,000. Then your accountant (or you) would Credit (Increase) Sales by $3,000 and Debit (Increase) Credit Card Fees by $3,000. The net effect to your Net Income is the zero, and your Income reported on your taxes is now correct. However, If you had reported your income at $100,000 – the amount you received into the bank – it would not align with the $103,000 reported to the IRS on your 1099-K, which could trigger a letter from the IRS.
5. Legal Entity Classification – Maximize Tax Savings:
Did you know that how your company is structured legally could determine how much you pay in taxes?
Business planning that results in tax savings begins with how your business is structured – your legal business entity type.
Are you a Sole Proprietor, Partnership, LLC, Corporation? If you are a corporation, what is your tax structure – C-Corp or S-Corp? All of this is meaningful to how you are taxed, how you should pay yourself, and opportunities for classifications of your expenses and distributions that save you money.
|BUSINESS ENTITY TYPE||PERSONAL LIABILITY PROTECTION||TAXED AT||PAYING OWNER|
|Sole Proprietor||None||Personal Tax Rate||Pass through to personal income|
|Partnership||None||Personal Tax Rate||Pass through to personal income|
|LLC (Single Member or Multi-member)||Yes||Taxed based on type: C-Corp, S-Corp, Sole Proprietor, Partnership||Depends on Taxation type|
|C-Corporation||Yes||Corporate Tax Rate (Dividends taxed additionally)||Salary|
|S-Corporation (Sub-S Election)||Yes||Personal Tax Rate||Salary / Distributions|
You don’t have to do it all. Hire a bookkeeper. Consult with a CPA for tax and legal structure questions. Use technology to do some of the work and to keep your business up to date on the latest tax laws.