Everything you need to sell online

Set up an online store in minutes to sell on a website, social media, or marketplaces.

12 Tips for Navigating the January Sales Tax Perfect Storm

Taxes for Small Businesses Made Easy

12 min read

Deciding to start a small business can be a daunting task. Many new business owners don’t know what to expect, which can cause some anxiety or fear. Business owners have to keep up with records and make sure their taxes are recorded correctly. For these and other reasons, lots of new small business owners find themselves fretting over their taxes.

Understandable. But not inevitable! We are here to help ease any anxiety or fear when it comes to doing your taxes as a business owner. And we’re here to tell you that there are a ton of ways to take the stress out of the season, from business write-offs to getting organized ahead of time! If you start out on the right foot and record your expenses as you go, you may actually be amazed at how much you can save.

How to sell online
Tips from e-commerce experts for small business owners and aspiring entrepreneurs.
Please enter a valid email address

What Factors Determine Your Taxes?

There are two main factors that determine how much tax, the legal entity you choose to create your business under, and the state you operate your business in.

Legal entity

When you set up your business there are four main legal entities you can choose from. Your choice will impact how you pay your taxes and what tax rate you will have to pay.

Sole proprietorship

If you choose to run your business as a sole proprietorship your business taxes will not be separate from your personal taxes. The internal revenue service (“IRS”) will not recognize your business as a separate legal entity for tax purposes. There are a few tax deductions you can take advantage of as a sole proprietorship, however, since your business is not legally separate from you as an individual it can be difficult to determine if you qualify for certain tax deductions. For this reason, it is not advised that you continue your business as a sole proprietorship long term. You could be losing out on a lot of savings each year with your taxes.

Partnership

Similar to the sole proprietorship, a partnership’s income is not taxed as business income, rather each partner will report their share of the business’s income as their own personal tax returns. If you have more than one member it is usually recommended by professionals that you consider registering as an LLC or incorporating your business.

LLC

The LLC is often the most recommended for small businesses. It is the perfect mixture of a partnership and a corporation. You can choose how you want to be taxed. You can either use the LLC as a pass-through entity or be taxed as a corporation. Most entrepreneurs will decide to use the LLC to be taxed as a pass-through entity rather than a corporation because you can avoid double taxation.

Corporation

Corporations often get the short end of the stick when it comes to taxes as an individual with a business. If you own a corporation, you have to pay a corporate tax on the business income as well as pay tax on your income you were paid by the corporation. If your business is still relatively small most of the time it is better to stick with the LLC option rather than incorporate your business. If you are not sure which would be best for your situation, consider reaching out to a business or tax professional before making the leap to incorporation.

State taxes

The second factor that will have a big impact on your taxes is your state’s income tax rates and business tax laws. There are some states that are very business-friendly when it comes to taxes and others that want to squeeze every penny they can out of your business.

Business-friendly states include: Florida, Nevada, New Hampshire, Utah, Alaska, and South Dakota. Some states you may want to reconsider include: California, Arizona, Louisiana, New York, New Jersey, and Vermont.

The treatment of taxes and businesses varies greatly from state to state. For example, Nevada does not have an income tax or corporate tax. Additionally, New Hampshire has no sales tax. If you are wanting to open a storefront that sells products you may want to consider New Hampshire because you won’t have to worry about paying sales tax on anything.

On the other hand, there are some states that you may want to avoid doing business in if you can. California and New York have some of the highest tax rates in the United States, which will eat into a big portion of your profits. New Jersey has the highest property tax in the United States, making it a place to avoid if you are going to have a physical location. New Jersey also has the second highest corporate income tax, so you may want to reconsider it if you are thinking of incorporating your business.

Business Taxes You Should be Aware Of

As a business owner, your taxes will look different than the average person who is an employee working for someone else. One benefit of being an employee is you can go almost the entire year without worrying about your taxes. You get your W-2 in the mail from your job and that is all you need to file your federal taxes and state income taxes. However, as a business owner, there are some taxes that you will be responsible for now. These taxes include:

Self-employment tax

As a business owner, you still have to pay medicare and social security tax on your income. For federal taxes, the self-employment tax rate is 15.3% of your business’s net income for the year. You will also have to pay state income tax, but this will vary depending on your state’s income tax rate.

Payroll tax

If you have employees you will have to make sure to withhold federal income tax, Medicare, and social security properly from your employees’ paychecks.

Excise tax

Depending on your business you may owe an excise tax. This is a federal government tax on businesses that manufacture or sell certain products. It may also apply if you use certain equipment, facilities, or products.

Sales tax

Sales tax is a state tax that any business may have to pay if they sell goods. Some states still like to tax you if you perform services. Make sure you register your business to help make sure you are paying taxes properly and look up your tax rate so you know how much to set aside in order to pay your taxes.

Property tax

Property tax is another state tax that you may or may not have to pay depending on whether you own a building that you do business out of and which state you live in. Property taxes vary widely across the United States, if you are considering purchasing a business building, you may want to check the state’s property tax.

Benefits of Paying Tax as a Business

While taxes seem like a pain (as they normally are), there are some benefits of being a business owner rather than an employee. This comes in the form of expenses and write-offs. While you have the burden of tracking all these expenses and write-offs if you create a system that works well and helps you stay organized you may find yourself actually enjoying taxes. Well, maybe we shouldn’t go that far. But at least you can make the process bearable!

These write-offs can be a number of things: if you do business over golfing, that counts as an expense! If you take all your employees out to lunch and pay for their meals, that is an expense. If you use part of your house for your business, that can be an expense. Keeping up with all these different kinds of expenses can really save you a lot of money when it comes time to pay taxes.

Here is a very simple example to show you how being a business owner can save you money.

Unlike an employee, businesses get the benefit of deducting their expenses prior to being taxed. For example, say an employee makes $100 a day and is taxed at a 10% rate and they want to go out to eat with some co-workers at lunch. That lunch costs them $15. These co-workers even discuss work while out at lunch. So after taxes that employee has $90 leftover, and then spends the $15 for lunch. Now that employee is left with $75.

On the other hand, say you are the business owner. You make $100 that day and are taxed at a 10% rate. You decide to go to lunch with some of your employees and you discuss work. You spend $15. Well that $15 is an expense! So you would take your $100 write off the $15 and you’re left with $85 and then taxes hit. So rather than being taxed $10 you are only taxed $8.50. So you are left with $76.5.

While this example is a simplified version, it does show the power of expenses and writing those off. These expenses tend to be higher than just $15 and tax rates don’t tend to be as high as 10% but we wanted to keep the math simple.

Conclusion

These tips are to help you start thinking of how to handle your taxes as a business, and to get oriented with some basic tips. Always seek tax advice from a tax professional if you have specific questions about your business’s taxes. At any rate, we wish you the best of your business venture, and encourage you to have no fear about getting those taxes done!

To help you out with taxes, Ecwid can calculate taxes automatically for merchants in the USA, the EU, Canada, Australia, and New Zealand.

 

Table of contents

Sell online

With Ecwid Ecommerce, you can easily sell anywhere, to anyone — across the internet and around the world.

About the author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

Ecommerce that has your back

So simple to use – even my most technophobic clients can manage. Easy to install, quick to set up. Light years ahead of other shop plugins.
I’m so impressed I’ve recommended it to my website clients and am now using it for my own store along with four others for which I webmaster. Beautiful coding, excellent top-notch support, great documentation, fantastic how-to videos. Thank you so much Ecwid, you rock!
I’ve used Ecwid and I love the platform itself. Everything is so simplified it’s insane. I love how you have different options to choose shipping carriers, to be able to put in so many different variants. It’s a pretty open e-commerce gateway.
Easy to use, affordable (and a free option if starting off). Looks professional, many templates to select from. The App is my favorite feature as I can manage my store right from my phone. Highly recommended 👌👍
I like that Ecwid was easy to start and to use. Even for a person like me, without any technical background. Very well written help articles. And the support team is the best for my opinion.
For everything it has to offer, ECWID is incredibly easy to set up. Highly recommend! I did a lot of research and tried about 3 other competitors. Just try ECWID and you'll be online in no time.

Your ecommerce dreams start here

By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
Your Privacy

When you visit any website, it may store or retrieve information on your browser, mostly in the form of cookies. This information might be about you, your preferences or your device and is mostly used to make the site work as you expect it to. The information does not usually directly identify you, but it can give you a more personalized web experience. Because we respect your right to privacy, you can choose not to allow some types of cookies. Click on the different category headings to find out more and change our default settings. However, blocking some types of cookies may impact your experience of the site and the services we are able to offer. More information

More information

Strictly Necessary Cookies (Always active)
These cookies are necessary for the website to function and cannot be switched off in our systems. They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. You can set your browser to block or alert you about these cookies, but some parts of the site will not then work. These cookies do not store any personally identifiable information.
Targeting Cookies
These cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.
Functional Cookies
These cookies enable the website to provide enhanced functionality and personalisation. They may be set by us or by third-party providers whose services we have added to our pages. If you do not allow these cookies then some or all of these services may not function properly.
Performance Cookies
These cookies allow us to count visits and traffic sources, so we can measure and improve the performance of our site. They help us know which pages are the most and least popular and see how visitors move around the site. All information these cookies collect is aggregated and therefore anonymous. If you do not allow these cookies, we will not know when you have visited our site.
We used machine translation for this page. If you experience discomfort with the language quality, please navigate to the international version of the website.