February 23, 2023

Understanding the Financial Implications of Dropshipping

Understanding the taxes and fees of any small business can be challenging, and dropshipping is no different. Learn the ins and outs here.
Understanding the Financial Implications of Dropshipping
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Like any other small business, those interested in going into the business of dropshipping need to be keenly aware of the tax processes associated with it. While, as a dropshipper, you won’t have to maintain the massive warehouses and pay upfront for all the stock you’re planning to sell, you must remember that you are still conducting a business. This business buys and sells goods, and with the profit you receive, you will need to consider the tax implications and any potential fees that may come from it.

Maintaining a thorough and solid accounting for your dropshipping business is the first step to avoiding any potential problems in the future. Keeping good records and knowing where your money is going is the first step in ensuring that you’re well within the law and that your business will maintain its profitability.

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Fees and Taxes Involved with Dropshipping

Businesses, regardless if you have a dropshipping business or not, are going to come with fees. However, dropshipping fees might be slightly different from traditional small business fees. 

First, because dropshippers do not house their own products and rely on a third party to send the product to the customer, dropshippers will often pay product sourcing fees. Additionally, because dropshippers are relying on a third party to ship the product to the customer, they will also be in charge of the shipping cost. Unless the seller gets the shipping fee upfront when the customer makes the purchase, that shipping cost will come out of the seller’s overhead. 

When considering any potential accounting for your dropshipping business, you will also need to track the payment processing fees, sales tax or VAT, income tax, and more. There are many elements to consider when you think about your Shopify accounting.

Fees cubes

Cost Structure

While you may not need to front as much money with a dropshipping business as you would with a traditional brick-and-mortar business, you will still have to anticipate operating costs. You will also need to account for the difference between gross and net profit to ensure that your business is turning a profit and not a loss.

When doing your Shopify seller accounting and totaling up all of the costs, a few of the items you should consider are:

  • Fixed costs: monthly and yearly fees and costs for seller and storefront platforms, payment processing platforms (like those for credit cards), and processing fees
  • Variable costs: costs that change with each transaction like product costs, product sourcing fees, shipping fees, sales taxes, and payment processing fees
  • Profit margins: a full accounting of both gross profits and net profits

While there are some aspects of the cost structure that you can anticipate, like the fixed costs, quite a bit of the accounting for your dropshipping business is fluid. Going into business knowing this and being able to anticipate accounting needs can save a lot of money and headaches in the future. 

Several different factors can affect the cost structure of your dropshipping business. Product sourcing costs, shipping costs, payment processing fees, volume discounts, and more are all variables that need to be accounted for when determining your cost structure and potential profitability. Not having a thorough understanding of these factors when you begin your dropshipping business can be detrimental to both your Shopify accounting and your business model.

Understanding Taxes

Taxes are probably the single most crucial factor to consider when accounting for your dropshipping business, but it’s also the factor that’s likely to cause you the biggest headache. There are several different taxes that you need to consider when starting your business, like sales tax, value-added tax (or VAT), income tax, and also localised sales taxes.

Sales tax (or VAT if you’re based in the UK) is the tax form that you will need to be acquainted with due to the nature of the business. When you own a dropshipping business and someone purchases something from you, you’re essentially making two simultaneous sales: one from the customer to you and one from you to the supplier or wholesaler. However, it’s important to note that the tax may only need to be paid once.

Typically when making dropshipping purchases, the customer will purchase the item from the dropshipper and pay the tax on that item. After that, the seller will pay the required tax to the government and then give the supplier or wholesaler a certificate exempting them from paying the tax. The supplier will keep that certificate as proof of payment and send the product to the original purchaser.

Different countries have different laws regarding sales tax and VAT, and ensuring that you stay on top of the different laws and regulations is vital to your business if you have purchasers from multiple countries. Do your research to ensure you’re staying compliant with all the laws!

glasses on accounting charts

Best Tax Practices

When you’re working on the accounting for your dropshipping business, it’s essential to stay on top of every little detail. Keep detailed records of your transactions, including each facet of the transaction (sales tax, VAT, processing fees, etc.). You should also regularly check and double-check your accounts to ensure that they’re all accurate and that every cent/penny is accounted for. 

If there is anything you’re unfamiliar with regarding taxes, then don’t try to do it yourself. Getting burned out and overwhelmed is not the way to ensure that you have a carefully organised and thoroughly checked Shopify seller accounting.

Instead, seek professional tax advice from a certified accountant or accounting professional to help you out. Their expert knowledge of taxes and tax laws will be able to help you figure out the best way to organise all of your documentation and keep the accounting for your dropshipping business up to date.

tax consulting office with statue in front

Link My Books

Here at Link My Books, we understand how difficult it can be to manage the numbers of your small business. Platforms like Amazon, eBay, and Shopify make it easy for your dropshipping business to thrive, but navigating those platforms in a way that makes accounting easy for you can be challenging.

That’s why we’re proud to offer all of our clients an amazing automated bookkeeping software that links directly to your accounting software and Shopify storefront. With this easy software, you’ll take the hours you might typically spend working with your accounting and turn it into time you can use to focus on growing your business.

If you’re a Shopify seller interested in using our incredible integrated software program to assist with the accounting for your dropshipping business, get started for free with us today!

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