You came up with the perfect business name and bought some inventory. But before you start listing products, you need to learn some basic strategies for dealing with e-commerce taxes.
As an online seller, you need to know what taxes to collect from your customers and how to pay the government. Keep reading to learn about some top strategies to help you.
Choose the Best Accounting Method
The first step in managing your e-commerce taxes is to choose the right accounting method for you. One option is the accrual method, and it tracks transactions.
So you'll only include a transaction in your books when you ship the coordinating order to the customer. The nice thing about it is that you can get a better overview of your business's financial health.
However, tracking your books this way can be more complicated than the other main accounting method. If you're doing all of the accounting yourself, you may not want to use the accrual method.
The biggest alternative is the cash method, which is where you track transactions when people pay you or you pay others. This method is best for newer businesses with a smaller sales volume.
It's easier to keep track of everything, so you can manage the books yourself. However, as your business grows, you may want to switch to the accrual method.
Track Your Expenses
Regardless of the accounting method you choose, you'll need to track your expenses as well as your revenue. Some popular expenses for e-commerce sellers include:
- Office costs
- Marketing and advertising
- Product inventory
You'll want to track how much you spend on these qualifying expenses in a year. Then, when you file your taxes, you can deduct that amount from your taxable income to reduce your tax burden.
You can track these expenses in the same digital software you use to track revenue and sales. Everything will be in one place, which can make filing your taxes much less stressful.
Be sure you keep any receipts for these purchases in case you need to prove the validity of your claims later. That way, you won't have to worry about needing to pay more in taxes or pay a penalty fee.
Learn Local Tax Laws
Another important part of your tax strategy, tax laws are vital for you to know. Review the tax laws in your country or city to learn if you need to track more than your income.
For example, you may need to track and pay value-added tax (VAT) in the UK. You should figure this out before you start selling in your e-commerce store so that you don't have to dig into your revenue to pay taxes.
Instead, you can collect taxes from the very beginning. Then, you'll want to set that money aside so that it's ready to pay when VAT is due.
If you don't want to learn about the local tax laws yourself, consider hiring an accountant. They'll understand the laws and can advise you on what to do to comply.
Keep Good Records
As you implement a few e-commerce tax strategies, always keep good, comprehensive records. You should have a record of every sale you make and the taxes you collect from your customers.
Keep a copy of every receipt for your business purchases. You can keep physical and digital copies so that you have backups in case files get lost.
It's also helpful to organize everything by year so that tax time is easier. When it comes time to file your taxes, you'll just need to refer to the files from the prior year for your tax return.
You can keep older files to be extra safe, but you should be able to delete them after a few years. Then, you can make room on your computer or in your office for newer documents.
Pay Taxes Quarterly
If you have a massive online store, you may need to pay the corporation tax each quarter. This tax is based on your estimated revenue, and you need to pay the UK government.
Even if your business is smaller, you may also need to pay VAT quarterly. To help prepare for these payments, set up a separate bank account and deposit all of the taxes you receive from customers.
At the end of the quarter, you can use that account to pay the government what you owe. If your company is large enough, you can use the same account to set aside a portion of your revenue for the corporation tax.
Automate What You Can
As a business owner, you have a lot to manage, from marketing to shipping orders. The more you can automate your e-commerce taxes, the easier they'll be to handle.
Luckily, you can automate your accounting with the help of software, like QuickBooks. Consider integrating your chosen accounting program with the platform you use to sell products online.
Then, it can more easily track your transactions for you. You'll still need to review those transactions and check for inaccuracies, but you can save a bit of time compared to entering every transaction manually.
Digital software is great, but it never hurts to hire an accountant or bookkeeper for extra assistance. A professional can review your transactions for you so that you can save even more time.
Plus, your accountant may recognize errors more easily than you can. They can resolve any problems with your accounting software or other business tools.
At the end of the quarter or year, your accountant can take care of filing and paying your taxes for you. You won't have to worry as much about making silly mistakes that could come back to bite you later.
Start Managing Your E-Commerce Taxes Today
Don't let e-commerce taxes keep you from starting or growing your online store. While paying taxes seems complex, it doesn't have to be overwhelming.
Be sure to look into the right tax strategies for your e-commerce business. Then, you can manage your books and pay your taxes on time, every time.
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