Online, small, sole-proprietor businesses are one of the fastest growing industries. Often, these are men and women who work online from their own homes. These online businesses include, blogging, virtual assistance, small craft sales, video and podcast influencers and more. But, one of the biggest questions asked is Do I Have to Pay Taxes for My Online Business?
One of the most common misconceptions about an online business is that because the business takes place online, virtually, the business isn’t required to pay taxes. Some think they can sell their products online and never pay a cent in either income or sales tax.
Perhaps, it’s because of this misconception that more and more people decide to give it a try to start their own online business.
If you have or are considering starting your own online business there are a few things you need to know about taxes.
Taxes You Need to Know About for Your Online Business
If you earn money, regardless of how that money comes into your household, you will need to declare the income on your tax return.
Selling your craft items online, is a business, and you earn income from that business therefore, you will need to declare that income, and pay taxes accordingly.
Blogging, can either be considered a hobby, or a business. The difference comes down to whether or the blogger uses their blog to earn income. If a blogger takes payment for sponsored content, advertisement, or paid posts, then that blogger is earning an income, and will need to declare the income on their tax returns.
Influencers, regardless of their social media platform who accept payment to advertise on behalf of a company will need to declare that income on their tax documents as well.
Income tax is a tax levied on the amount of income each person receives. Income tax is assessed at the Federal level, many states impose income tax, and often cities will also levy income as a means of supporting the city government.
Working from home, or doing single one time jobs, simply means you are a freelance, or commission based self-employee. Regardless of how your income is produced, by law, you are required to declare it on your tax returns.
So it doesn’t matter you are working at home, in a store, an office, or even a warehouse, you are still obligated to pay taxes on the income you earn.
Sales & Use Tax
Another tax to be aware of is sales tax. Each state, and county, and city can levy sales tax. Many levy sales tax on items purchased within the physical property of the state, county or city.
But did you know, those same municipalities can levy a sales and use tax on items purchased from you, online? They don’t have to physically drive to your location to receive the goods. You simply have to send them the goods, and because you reside in the state/county/city, you may be required to collect sales tax from your buyer. If you fail to do so, you may be responsible to pay the sales tax from your own pockets.
Learn more about Sales & Use Tax.
Some companies like Etsy, Amazon, and Zazzle allow online entrepreneurs to sale their products on their stores. They take a cut of the profits, and do all of the point of sales service while the small business entrepreneur collects income, and handles shipping of the items they sell.
In these cases, the online store may collect the sales tax and pay the state and local municipality any sales or use tax that is owed, on behalf of the seller. It’s best for each seller to fully read the website’s Terms of Service documentation to determine who pays for what when it comes to sales and use tax.
You wouldn’t want to be stuck paying sales tax on everything you sell, when you assumed the website would do it for you.
Sales Tax on Digital Goods or Services
Another question asked is, do I have to collect sales tax on digital, not physical goods that I sell online?
The answer is, it depends on the state you reside in. Some states do require a sales tax for digital good sold, and others do not. Though I suspect that as the digital continues to roll along, more and more states will add digital sales tax to their tax codes.
Check with your state’s treasury office or the county tax office where you live.
Paying Taxes as a Sole Proprietor Business or a Corporation
If your online business is a sole proprietorship, or a single owner business, any income you earn online will be taxed as income on your personal tax return, or jointly if married and file jointly.
If however, you are an incorporated business, you still need to file tax forms showing your business income for each year. You will likely need to pay your taxes quarterly to ensure that you are able to pay the full tax on your business income. Failure to do so, could result in high penalties assessed against what you owe.
To be sure you are paying your taxes correctly, whether personal or business income, or sales and use tax the best thing to do is check with your the Secretary of State office in your state. You can usually find documents explaining the procedure for your online business.
If you are an online business owner and you you still aren’t sure if you need to pay federal income tax, the simple answer is yes.
If you have incorporated your business, then you will still pay taxes, only the process is slightly different.
While dealing with taxes can seem like a nightmare, it doesn’t have to be. Cowdery Tax and Business Solutions can help you figure out what you need to pay, and even help you manage your online bookkeeping to keep it all in order.
Now is the best time to get your documentation together, so that you are ready to prepare your forms when tax season starts.
Call or schedule your appointment today so we can help you pay taxes for your online business in the appropriate way.