If you are an online seller in the US, you have tax obligations at the federal, state, and local levels that you must meet to stay tax-compliant. There are a host of factors basis which you need to determine the type of taxes you must pay and how you must pay them as an online seller.
Two of the most important factors that help you determine your tax obligations include your business structure and location. Other factors include the type of products or services you sell online, the amount of profit your business generates, the industry your business belongs to, the employment status of your business, and so on. Since all these factors impact your sales tax obligations, it’s recommended that you constantly check with the federal, state, and, local government tax regulations to know your tax obligations and how you must meet them.
For instance, different codes of conduct apply to each business structure when considering state and local tax obligations. If you run your Shopify business as a Corporation, you will be taxed separately from the owners. However, if you are a sole proprietor, you will report your personal and business income taxes using the same tax form. Furthermore, if your Shopify business has employees, you must pay state employment taxes by filing specific tax forms. What adds to the complexity is that each state has its own rules and regulations for employment taxes.
This means that as a Shopify seller, you must know what your tax obligations are and how you must meet those obligations well in advance so that you can be tax-compliant and have a strong legal standing.
If you are a Shopify seller or someone planning to launch a Shopify store and who wants to know what are the various taxes and tax documents that one needs to file to stay compliant, read this guide. In this guide, we are going to walk you through in detail the various business taxes that you must pay as a Shopify seller, the Shopify Tax Documents that you must file in 2023, and how to get Shopify tax documents online.
Shopify Taxes: Common Taxes eCommerce Businesses Need To Pay
Like any other business, your online business is subject to various taxes depending on factors including your business structure, business location, nature of operations, industry, employment status, and so on.
Let’s first consider business structure. Each business structure including sole proprietorship, partnership, limited liability company (LLC), S corporation, and C corporation has different tax rules and implications.
Likewise, your business location has an impact on your tax obligations as different states or countries have their tax laws and rates.
Similarly, certain industries are subject to specific taxes or regulations. For example, businesses involved in manufacturing, healthcare, or transportation may have unique tax considerations or incentives.
Furthermore, if your business has employees, you’ll need to account for employment taxes, including payroll taxes, Social Security, and Medicare taxes. In such a case, the number of employees and their compensation can impact these obligations.
Therefore, as an online seller, you need to understand and comply with all applicable tax laws and regulations as failure to do so can result in fines, penalties, and legal issues. It’s recommended that you seek the assistance of tax professionals, such as accountants or tax attorneys, to ensure compliance and optimize your tax strategies.
Now, to help you have a basic understanding of taxes and tax documents, in this section, we will talk about some of the common business taxes that your Shopify business may be responsible for.
1. Sales Tax
One of the most common taxes that you may be responsible for as a Shopify business is the Sales Tax. Sales Tax is a tax imposed by state or local governments on the sale of tangible goods and, in some cases, digital products and services.
Now, determining Sales Tax as a Shopify business can be complex because it involves multiple factors, including your business location, your customers’ locations, and the products or services you sell.
Moreover, there are some key things about sales tax that you need to know as an online seller.
One of the key points is the Physical Nexus. Generally, businesses are required to collect and remit sales tax on the sales they make to customers located in states where they have a sales tax nexus.
“Sales Tax Nexus” or “Physical Nexus” in sales tax refers to a legal connection or presence that a business has in a particular state. Typically, having a physical nexus arises from a physical presence, such as having a brick-and-mortar store, warehouse, office, or other significant physical facility within the state’s borders.
Thus, a business’s Physical Nexus in a state obligates such a business to collect and remit sales tax on transactions within that state.
Also, each state has its own rules regarding physical presence as a sales tax obligation trigger.
For instance, some states have adopted economic nexus laws, which establish a tax obligation based on a certain level of sales or transactions a business has in the state, regardless of its physical presence.
Furthermore, the U.S. Supreme Court’s decision in the South Dakota v. Wayfair case in 2018 led to a significant shift in sales tax laws. The decision allowed states to require businesses to collect and remit sales tax based on economic activity (i.e., sales thresholds) rather than just physical presence. As a result, many states have since enacted economic nexus laws that require out-of-state businesses to collect sales tax once they meet certain sales or transaction thresholds within the state, regardless of whether they have a physical presence.
All of these complications prove that sales tax laws can be complex and subject to change. Accordingly, you as an online business should stay informed about the requirements in each state where you conduct business. Plus, you need to seek guidance from tax professionals or legal experts to ensure compliance.
READ: Shopify Statistics 2023
2. Federal Income Tax
Just like any other business entity, online businesses in the United States are subject to Federal Income Tax.
Federal Income Tax is a tax imposed by the United States federal government on the income that individuals, businesses, and certain organizations earn. This tax is based on the principles of taxation that the Internal Revenue Service (IRS) established in the form of the Internal Revenue Code (IRC), which is the federal tax law.
Thus, the IRS is the federal agency responsible for administering and enforcing federal income tax laws, processing tax returns, collecting taxes, and providing guidance and information to taxpayers to ensure accurate and timely compliance with federal tax obligations.
Now, the Federal Income Tax that you owe as an online business varies based on factors such as the type and amount of income you earn, deductions and credits you claim, and the tax filing status that you hold. This indicates that the tax code is complex and you as a taxpayer are responsible for understanding and complying with its provisions, which can change over time due to legislative actions and regulatory updates.
In addition to the above, the Federal Income Tax in the United States follows a “pay-as-you-go” tax system. This means that you are generally required to pay your federal income tax liabilities throughout the year as you earn income, rather than waiting until the end of the tax year to pay in a lump sum.
How does this pay-as-you-go system work? Well, since you are a self-employed individual doing business either in the form of a sole proprietorship, a partnership, an S-Corporation, or a C-Corporation, you are required to make estimated quarterly tax payments. Provided you have tax liabilities that are beyond the thresholds set for each of the business structures.
The Estimated Tax Payment method is unlike the tax withholding method wherein many employers withhold federal income taxes from the employees’ paychecks based on the information they provide on Form W-4.
Also, note that the Estimated Tax Payments are based on your expected income and are intended to cover your federal income tax liability throughout the year.
Further, the Federal Income tax is calculated on the taxable income that you earn as an eCommerce business.
As per the IRS, taxable income for federal income tax purposes is the portion of your online business’s income that is subject to federal income tax. It includes all sources of income, such as wages, salaries, self-employment income, rental income, interest, dividends, capital gains, and more.
Furthermore, your taxable income accounts for the above-the-line deductions, also known as adjustments to income, which are nothing but deductions that you can take as an online business before calculating your adjusted gross income (AGI).
In addition to the above-the-line deductions, your taxable income also takes into account the standard deduction or itemized deductions and the tax credits including the Child Tax Credit, Earned Income Tax Credit (EITC), and education credits that directly reduce the amount of tax you owe.
Finally, if you run your online store as a sole proprietor, you must report your income in Form 1040. However, if you run your online store as a Corporation, you must report your income in Form 1120.
3. Self-Employment Tax
Self-employment tax refers to the Social Security and Medicare Taxes primarily for individuals who work for themselves. As per the IRS, a self-employed individual is the one who:
- Carries on a trade or business as a sole proprietor or an independent contractor.
- Is a member of a partnership that carries on a trade or business.
- Is otherwise in business for himself or herself as a part-time or a gig worker.
This means whether you run your online store in the form of sole proprietorship, partnership, or corporation, you are self-employed in the eyes of the IRS. Thus, as a self-employed, you must pay self-employment tax, provided your net earnings from self-employment are $400 or more.
Note that the Self-Employment Tax is much like the Social Security and Medicare taxes that employers withhold from the pay of most wage earners. In cases where the employers withhold Social Security and Medicare Taxes for the wage earners, the employers calculate this tax.
However, in case of the self-employed individuals, they need to determine the self-employment tax (SE tax) using Schedule SE of Form 1040 or 1040-SR. Note that you must use Schedule SE of Form 1040 to figure out and report your SE tax.
The SE tax rate on net earnings is 15.3%: 12.4% social security tax plus 2.9% Medicare tax.
Also, while determining their self-employment tax, self-employed individuals need to deduct the employer-equivalent portion of their SE tax in figuring their adjusted gross income. But if we take the case of the wage earners, they cannot deduct Social Security and Medicare taxes on their own.
What this means is that only 92.35% of the self-employed earnings are subject to Social Security and Medicare taxes. This is because employers pay Federal Insurance Contributions Act (FICA) and Medicare taxes for each of their employees equal to 7.65% of the employee’s salary. Thus, that 7.65% is subtracted from the income of the self-employed to calculate their FICA and Medicare tax amount (100% – 7.65% = 92.35%).
The purpose behind deducting such a rate is that only 92.35% of the total self-employed earnings would have been the income of the self-employed individuals if they were employees. That’s because in such a case, their employer would have spent the other 7.65% on the tax.
4. Excise Tax
As per the IRS, the Excise Taxes in the United States are taxes imposed on the sale or use of specific goods, services, or activities.
This means as a business, you are required to pay excise tax if you:
- Manufacture or sell certain products
- Operate certain kinds of businesses
- Use various kinds of equipment, facilities, or products
- Receive payment for certain services
Thus, unlike income taxes, which are based on a person’s or business’s income, excise taxes are typically applied to particular items, transactions, or behaviors.
The IRS administers various types of excise taxes, including but not limited to:
- Alcohol Excise Tax imposed on the sale of alcoholic beverages, such as beer, wine, and spirits
- Tobacco Excise Tax applied to the sale of tobacco products, including cigarettes, cigars, and smokeless tobacco
- Fuel Excise Tax levied on the sale of gasoline, diesel fuel, and other motor fuels
- Air Transportation Excise Tax imposed on passengers and cargo transported by air
- Environmental Excise Taxes including taxes on items like ozone-depleting chemicals and certain petroleum products
- Luxury Excise Tax applied to the sale of luxury items like high-end automobiles
- Firearms and Ammunition Excise Tax applied to the sale of firearms, ammunition, and archery equipment
- Communications Excise Tax historically applied to long-distance telephone services but is no longer in effect as of 2006
So, if as an online business, you sell any of the goods or services that are applicable for excise tax, then you are required to collect such a tax at the point of sale and remit it to the IRS.
Various forms are used to report and pay excise taxes, depending on the specific tax type.
For example, Form 720 is used to report and pay certain environmental taxes; communications and air transportation taxes; fuel taxes; tax on the first retail sale of heavy trucks, trailers, and tractors; manufacturer’s taxes on the sale or use of a variety of different articles; a tax on indoor tanning services. Whereas, Form 2290 is used for reporting and paying the heavy highway vehicle use tax.
Also, some excise taxes have special rules and credits. For instance, there are provisions for tax credits related to biodiesel and renewable diesel fuels, and there are exemptions for certain uses of fuel (e.g., off-highway use).
Thus, taxpayers subject to excise taxes should stay informed about the latest IRS guidance and requirements to ensure compliance with these specific tax obligations.
5. Employment Taxes
If your online business has employees, you have certain employment tax responsibilities as an employer.
According to the IRS, Employment Taxes are the taxes that employers are required to withhold and pay on behalf of their employees. These taxes fund various government programs and entitlements, including Social Security, Medicare, and unemployment benefits.
In the United States, Employment Taxes include:
- Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA), also called FICA taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
Let’s briefly understand what each of these taxes means and how much of these taxes you need to pay as an online seller.
1. FICA Taxes
The term FICA stands for the Federal Insurance Contributions Act. It is a U.S. federal law that establishes the system of payroll taxes used to fund two major social insurance programs: Social Security and Medicare. These taxes are levied on both employees and employers to finance these programs.
- Social Security Tax
The Social Security tax portion of FICA funds the Social Security program, which provides retirement, disability, and survivor benefits to eligible individuals and their families. As of 2023, the Social Security tax rate is 12.4% of an employee’s wages, up to a certain annual limit, also known as the Social Security wage base. This wage base is $147,000 for the year 2023.
Since FICA taxes are levied on both employers and employees, both employees and employers contribute 6.2% of each of the employee’s wages, up to the wage base towards the Social Security Tax.
Now, how do you pay this tax as a self-employed? Since you are self-employed as an online business, you are responsible for both the employee and employer portions. Thus, you need to pay a total of 12.4% of your net earnings from self-employment towards the Social Security Tax.
- Medicare Tax
The Medicare tax portion of FICA funds the Medicare program, which provides healthcare benefits for individuals aged 65 and older, as well as certain individuals with disabilities.
As of 2023, the Medicare tax rate is 2.9% of an employee’s total wages, with both employees and employers contributing equally at 1.45%. Unlike the Social Security Tax, there is no wage limit or wage base for the Medicare tax.
Additionally, high-income earners may be subject to an Additional Medicare Tax of 0.9% on wages above certain income thresholds: $200,000 for single filers and $250,000 for married couples filing jointly.
FICA taxes are an essential source of revenue for the federal government and play a significant role in funding social insurance programs that provide financial security and healthcare coverage for millions of Americans.
Employers are responsible for withholding FICA taxes from their employee’s paychecks and remitting both the employee and employer portions to the IRS. They must also report these taxes on various forms, such as Form 941, the Employer’s Quarterly Federal Tax Return.
But, you as a self-employed must report and pay your self-employment tax when filing your federal income tax return using Schedule SE.
2. Federal Income Tax Withholding
According to the IRS, employers must remit federal income taxes to the IRS on behalf of the employees by following the Federal Income Tax withholding process. It is a process by which you as an employer must deduct federal income taxes from your employee’s paychecks and remit those taxes to the IRS on behalf of your employees.
Note that the federal income tax withholding system helps employees meet their federal income tax obligations throughout the year rather than having to pay the entire tax liability in a lump sum when filing their annual tax returns.
How does the federal income tax withholding work? When employees join your Shopify store, they must complete IRS Form W-4, called the Employee’s Withholding Certificate. This form provides you with important information about the employee including the employee’s filing status, number of withholding allowances claimed by the employee, and any additional amount you must withhold.
Using the information provided on Form W-4 by the employee, you calculate the amount of federal income tax to withhold from each paycheck. To calculate this amount, you take into account factors such as your employee’s wages, his or her filing status, the allowances he or she has claimed, and any additional withholding requested.
Once you calculate the federal income tax withholding amount, you deduct such an amount from your employee’s gross pay for each pay period. Furthermore, you set aside the withheld amount to be remitted to the IRS.
Thus, as an employer, you must ensure that your employees keep their Form W-4 up to date, especially when their financial or personal circumstances change. For instance, when they get married, have children, or experience significant income changes. Also, you must stay compliant with federal withholding requirements and accurately calculate and remit the withheld taxes to the IRS to avoid penalties and ensure your employees’ tax obligations are met.
3. FUTA Taxes
If your Shopify store has employees, then you are required to pay the FUTA tax as an employer.
FUTA stands for the Federal Unemployment Tax Act (FUTA). The FUTA tax is a payroll tax in the United States that helps fund the federal unemployment benefits program. It provides financial support to state unemployment insurance programs, which offer temporary income assistance to eligible workers who have lost their jobs through no fault of their own.
Only employers need to pay this tax and is separate from the state unemployment taxes. FUTA tax applies to most employers who meet certain criteria. However, there are exceptions for certain types of employers and employees. For example, agricultural employers and some nonprofit organizations may be exempt from FUTA tax.
The standard FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year. This wage threshold is often referred to as the “FUTA wage base.” This means that the maximum FUTA tax that you as an employer can pay for each employee in a year is $420 (6% of $7,000).
Furthermore, there are instances where employers may have to pay a higher effective FUTA tax rate. Now when does this happen? It happens when there is a credit reduction in the FUTA tax. A credit reduction in FUTA tax occurs when a state has outstanding loans from the federal government that were used to cover its unemployment insurance program expenses and it has not repaid these loans within the allowable time frame. As a result, the federal government reduces the FUTA tax credit available to employers in that state. This reduction effectively increases the FUTA tax rate that employers must pay in the affected state.
Also, as an employer in the United States, you may receive FUTA tax credits against your federal unemployment tax liability. These credits are designed to encourage and reward employers who pay state unemployment taxes on a timely basis and who contribute to state unemployment insurance (UI) programs.
You as an employer can generally receive a credit of up to 5.4% of the first $7,000 of wages that you pay to each employee during the calendar year. This is equivalent to a maximum credit of $378 per employee ($7,000 x 5.4%).
If you want to be eligible for this credit, you must meet the requirements of the FUTA law as an employer, including making timely payments to your state UI agencies.
Shopify Tax Documents 2023
Since you have an understanding of the taxes you must pay as an online business, we will now chart out the common Shopify Tax Documents you must file. The following table showcases the tax forms that you must file as an online business.
|Income Tax||Form-1040 or Form 1040-SR, and Schedule C||15th day of 4th month after the end of the tax year|
|Self-Employment Tax||Schedule SE||File with Form 1040 or Form 1040-SR|
|Estimated Tax||Form 1040-ES||15th day of 4th, 6th, and 9th months of tax year, and 15th day of 1st month after the end of tax year|
|Social Security and Medicare Taxes and Income Tax Withholding||Form 941 or Form 944||April 30, July 31, October 31, and January 3 (For 2023)|
|Providing Information On Social Security AndMedicare Taxes And Income Tax Withholding||W-2 (to employee) W-2 and W-3 (to the Social Security Administration)||January 31January 31|
|Federal Unemployment Tax (FUTA)||Form 940||January 31April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $500.|
|Filing Information Returns For Payments ToNonemployees And Transactions With OtherPersons||Form 1099-MISCForm 1099-NECForm W-2Form 8300||Forms 1099—to the recipient by January 31 and to the IRS by February 28 (March 31 if filing electronically|
|Excise Tax||Form 720Form 2290||April 30, July 31, October 31, January 31|
The following section briefly explains each of the tax forms.
IRS Form 1040 is the standard U.S. federal income tax form that individual taxpayers use to report their annual income and calculate their federal income tax liability. This form is used to report various types of income, including wages, salaries, self-employment income, interest, dividends, capital gains, rental income, retirement income, and more.
Now, if you run your Shopify store as a sole proprietor, you must file Form 1040 to report your business income. In addition to this, you must also file Schedule C along with Form 1040 to report your business expenses. The deadline for filing Form 1040 is typically April 15th, though it can be extended to a later date if requested.
However, if you run your Shopify store as a partnership, you must file Form 1065. Form 1065 is the U.S. Return of Partnership Income that partners in business use to report their income, deductions, credits, and other tax-related information. Partners also receive a Schedule K-1 (Form 1065) that reports their share of partnership income, which they use to report on their individual tax returns.
Then, if you run your Shopify store as an LLC, the federal tax return documents to be filed with the IRS will depend upon the number of members and elections that your LLC makes. That’s because the number of members and elections made would determine whether your online store should be treated as a sole proprietorship, partnership, or corporation for tax purposes.
Next, if you operate your Shopify store as a Corporation, including S corporations and C corporations, you typically need to file different business tax returns. For instance, if you are an S corporation, you must file Form 1120-S. Whereas, if you are a C corporation, you must file Form 1120. Furthermore, the shareholders in S corporations receive a Schedule K-1 (Form 1120-S) to report their share of corporate income.
Finally, if you are a Non-Profit Organization running a Shopify store, in such a scenario, you must file Form 990 series returns such as Form 990, Form 990-EZ, or Form 990-N (e-Postcard), depending on your size and financial activity.
IRS Form 1040-SR is called the U.S. Tax Return for Seniors. It is a simplified version of the standard IRS Form 1040. This form is specifically designed for individual taxpayers who are aged 65 and older to make it easier for them to file their federal income tax returns. Seniors can use Form 1040-SR to report various types of income, including Social Security benefits, retirement income, interest income, dividends, and capital gains.
So, if you are a Senior running a Shopify store as a sole proprietor, you must file Form 1040-SR to report various types of income as mentioned above by April 15th.
IRS Form 1040-SE is called the Self-Employment Tax Return. Self-employed individuals in the United States use this tax form to report and calculate the self-employment tax they owe. The self-employment tax is a tax that covers both the employee and employer portions of Social Security and Medicare taxes for self-employed individuals.
Furthermore, the self-employment tax liability is based on net earnings obtained from self-employment. These net earnings are typically derived from the profit or loss reported on Schedule C (Profit or Loss from Business), Schedule C-EZ (Net Profit from Business), or Schedule F (Profit or Loss from Farming).
Furthermore, to file this return, a self-employed individual must have net earnings of $400 or more from self-employment during the tax year.
So if you run your Shopify store as a sole proprietor, you must file Form 1040-SE in addition to your individual income tax return (Form 1040 or other appropriate forms). That’s because you as a self-employed individual are responsible for paying both the employee and employer portions of Social Security and Medicare taxes, which are collectively referred to as self-employment taxes.
IRS Form 1040-ES is called the Estimated Tax for Individuals. Individual taxpayers in the United States who expect to owe income tax that is not subject to withholding, such as self-employment income, rental income, interest, dividends, and capital gains use this tax form. Such taxpayers use this form to calculate and make estimated tax payments to the IRS which are typically made on a quarterly basis. These estimated tax payments ensure that taxpayers meet their income tax obligations throughout the tax year.
So if you run your Shopify store as a sole proprietor, you must file Form 1040-ES in addition to your individual income tax return (Form 1040 or other appropriate forms).
IRS Form 941 is called the Employer’s Quarterly Federal Tax Return. Employers in the United States use this tax form to report income taxes, Social Security tax, and Medicare tax withheld from employees’ paychecks, as well as the employer’s portion of Social Security and Medicare taxes. They must file Form 941 on a quarterly basis to report these payroll taxes and reconcile them with the deposits they have made throughout the quarter.
Therefore, if your Shopify store has employees, you must file Form 941 with the IRS quarterly to report the federal income taxes that you owe as an employer.
IRS Form 944 is called the Employer’s Annual Federal Tax Return. Eligible Small Employers in the United States use this tax form to report and pay their federal employment taxes on an annual basis, rather than a quarterly basis.
The purpose of Form 944 is to simplify the tax reporting process for small businesses with a lower annual federal tax liability. Small Employers in the United States are the ones who have an annual employment tax liability of $1,000 or less and are eligible to file Form 944.
Note that the IRS determines the Small Employers’ eligibility based on the employer’s reported tax liability in previous years. Unlike Form 941 which requires filing quarterly employment tax returns, eligible small employers must file Form 944 annually.
The filing deadline for Form 944 is generally January 31 of the following year. Furthermore, Form 944 covers several tax components including Form 944 covers several tax components, including federal income tax withheld from employees’ wages, employee and employer portions of Social Security tax (OASDI), employee and employer portions of Medicare tax, and any additional Medicare tax withheld from employees.
So, if your Shopify store has an annual employment tax liability of $1000 or less, you are eligible to file this form with the IRS annually to report and pay your federal employment taxes.
IRS Form W2 is called the Wage and Tax Statement. Employers in the United States must provide this tax document to their employees and submit it to the IRS. This form reports an employee’s annual earnings and the amount of taxes that employers withhold from their wages.
Thus, it covers information including the employee’s name, address, and Social Security Number (SSN); the employer’s name, address, and Employer Identification Number (EIN); earnings from wages, salary, tips, bonuses, and other compensation; federal, state, and local income tax withheld from the employee’s pay; Social Security and Medicare taxes (FICA) withheld from the employee’s pay; contributions to retirement plans, such as a 401(k), other information such as the value of non-cash benefits and more.
Furthermore, there are multiple copies of Form W-2 that the employers must provide to different entities. For instance, copy A is sent to the Social Security Administration (SSA); copy 1 is for the employee’s state, city, or local tax department, if applicable; copy B is for the employee’s federal tax return; copy C is for the employee’s records; copies 2, 2 (state), and 2 (local) are for the employee’s state, city, or local tax returns, if applicable; and copy D is for the employer’s records.
Since the employees also receive a copy, they use the information on Form W-2 to prepare and file their federal, state, and local income tax returns. Thus, Form W2 helps the employees to ensure that they report their earnings and taxes accurately.
IRS Form W-3 is called the Transmittal of Wage and Tax Statements. This is a summary transmittal form that employers use to report the total wages, tips, and other compensation, as well as the total withholding, for all employees to the Social Security Administration (SSA). Thus, Form W3 provides the SSA with a concise overview of an employer’s annual payroll information. As stated in the table above, employers must file Form W-3 and copies of Form W-2 with the SSA by the last day of February (if filing on paper) or by the last day of March (if filing electronically) following the end of the tax year.
IRS Form 1099-MISC is called Miscellaneous Income form. Businesses and individuals in the United States must use this form to report various types of miscellaneous income paid to non-employees, independent contractors, and certain other entities. They must file this form only when they make payments of $600 or more for services performed by someone who is not an employee during the tax year.
Note that Form 1099-MISC is used to report various types of payments. These include but are not restricted to payments to independent contractors or freelancers for services rendered; payments of $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest; rent payments of $600 or more for office space, equipment, or other property; prizes, awards, or other income paid to winners of contests or events; payments for medical and healthcare services (if applicable); and fish purchases for cash (for those in the fishing industry).
Furthermore, businesses and individuals who need to file Form 1099-MISC must provide a copy to the recipient, that is the payee, by January 31st of the following year. In addition to this, they must also file this form with the IRS by the last day of February (if filing on paper) or by the last day of March (if filing electronically).
IRS Form 1099-NEC is called the Nonemployee Compensation form. Businesses and individuals in the United States use this form to report payments made to non-employees, including independent contractors, freelancers, and self-employed individuals, for services rendered. They must use this form to report payments of $600 or more made during the tax year for nonemployee compensation. This typically includes payments for services performed by individuals who are not classified as employees.
Furthermore, the businesses and individuals, who are typically the payers of nonemployee compensation, must provide a copy of Form 1099-NEC to the recipient (the payee) by January 31st of the following year. They must also file this form with the IRS by the last day of February (if filing on paper) or by the last day of March (if filing electronically).
IRS Form 8300 is called the Report of Cash Payments Over $10,000 Received in a Trade or Business form. As the name suggests, businesses in the United States use this form to report cash transactions involving payments of $10,000 or more received in the course of their trade or business.
Also, businesses engaged in a trade or business, including individuals operating sole proprietorships, must report cash payments of $10,000 or more received in a single transaction or related transactions within a 24-hour period.
Thus, the primary purpose of making businesses file Form 8300 is to assist the IRS and other government agencies in detecting and preventing money laundering and other financial crimes.
Note that Form 8300 covers a wide range of cash payments. These include the payments received for the sale of goods, services, rent, real estate, and more. It also includes payments received in the form of cash, money orders, cashier’s checks, traveler’s checks, and certain other monetary instruments.
To stay compliant, businesses must file Form 8300 within 15 days after receiving the cash payment that triggers the reporting requirement.
IRS Form 720 is called the Quarterly Federal Excise Tax Return. The taxpayers in the United States use this form to report and pay excise taxes on various goods, services, and activities. These taxpayers or entities who are responsible for collecting and remitting excise taxes to the IRS typically include manufacturers, importers, wholesalers, retailers, and service providers, depending on the type of excise tax.
These excise taxes are often levied on specific industries and businesses typically need to collect these taxes on behalf of the government. Furthermore, businesses must file Form 720 on a quarterly basis.
IRS Form 2290 is called the Heavy Highway Vehicle Use Tax Return. The owners and operators of heavy vehicles use this tax form to report and pay the federal excise tax known as the “Heavy Vehicle Use Tax” (HVUT). This tax is imposed on certain heavy vehicles that operate on public highways in the United States. The revenue generated from the HVUT is used to fund highway maintenance and construction projects.
Individuals, businesses, and organizations that own or operate heavy vehicles with a gross weight of 55,000 pounds or more and that use public highways for transportation must file Form 2290 with the IRS annually.
The deadline for filing Form 2290 is typically August 31st of each year for vehicles that are used on the road beginning in July of that year. However, the deadline is extended to the next business day if the due date falls on a weekend or holiday.
Form 2290 applies to a wide range of heavy vehicles, including trucks, truck tractors, and buses, as well as certain trailers and semi-trailers that meet the weight threshold.
Shopify Tax Documents 1099-K
In addition to the above Shopify tax documents, there is another tax document that you need to know about as a Shopify store owner. This tax document is Form 1099-K. Now what is Form 1099-K and when and from whom do you receive this form as a Shopify business?
Well, sellers selling goods or services through an online marketplace or using any payment apps or payment cards to receive payments may receive Form 1099-K from such an online marketplace, payment app, or payment card provider respectively.
That’s because such online marketplaces, payment apps, or payment card providers are required to file Form 1099-K with the IRS to report the payments they made to the sellers for selling goods or services through the online marketplace, or the payment app or the payment card users receiving payments through the app or the card. Provided such payments exceed the minimum threshold the IRS sets for reporting taxes.
Thus, it’s crucial for sellers selling goods or services on online marketplaces or the payees receiving payments through payment apps or payment cards to complete Form 1099-K they received from the respective entity for tax reporting purposes.
So if you are a Shopify business owner using Shopify Payments to accept online customer payments, you may receive Form 1099-K from Shopify.
What Is Form 1099-K?
Form 1099-K is a Payment Card and Third Party Network Transactions information return. Such a return is used by payment card companies and payment apps or online marketplaces (also called third-party payment networks) to report to the IRS the gross amount of reportable transactions undertaken by them for the calendar year.
Note that third-party payment networks like payment apps or online marketplaces have the contractual obligation to make payments to merchants or businesses (also called participating payees) of third-party network transactions.
Accordingly, Shopify Payments, a payment app, has the contractual obligation to make payments to Shopify store owners who are using the app to accept payments online from the purchasers of its products or services. Thus, the Shopify store owners are the participating payees. These payees accept payments made by the Shopify Payments app to settle the transactions the purchasers made on the Shopify store as a result of purchasing goods or services from the store.
Thus, Shopify is required to file Form 1099-K to the IRS to report the gross reportable transactions of the Shopify store owners to whom they make payments. Provided the Shopify store owners have gross reportable transactions of more than $600, irrespective of the number of transactions.
Does Shopify Give You A 1099?
Shopify will send you Form 1099-K only if you are using Shopify Payments as a method to accept online payment. That is, Shopify submits Form 1099-K to the ORS on behalf of the Shopify store owners only if such store owners are using Shopify Payments.
Besides using Shopify Payments as a method to accept online payments, the Shopify store owners must also satisfy the following requirements in order to receive Form 1099-K from Shopify:
- You must receive more than 20,000 USD in gross payments and have more than 200 transactions for calendar years prior to the tax year.
- You must receive more than 600 USD in gross payments and have any number of transactions for the tax year and later.
- You must meet your state’s individual thresholds.
In case you do not meet the above requirements, you will not receive Form 1099-K from Shopify.
How To Get Shopify Tax Documents Online?
As a Shopify store owner, you must know that Shopify provides certain tax-related documents to help you as a merchant manage your finances and fulfill your tax obligations. These documents may vary depending on your location and business activities.
However, some of the common tax-related documents and features that Shopify provides to you as a merchant include the following:
Shopify generates various tax reports that you can use as a merchant to calculate and file your taxes. These reports include sales tax reports, transaction reports, and order reports, which can be customized to suit your needs. Read our article on how to create a Shopify Sales Tax Report to understand step-by-step the process to get a sales tax report on your Shopify dashboard.
Shopify will send you Form 1099-K only if you are using Shopify Payments as a method to accept online payment. This form reports your gross payment processing activity and is typically used for income tax purposes. Remember, not all Shopify payments are reported on a 1099-K. Thus, you must consult with a tax professional for guidance.
If you are a Shopify store owner receiving $600 or more using Shopify Payments on your Shopify store, you qualify for the 1099-K threshold set by the IRS. Accordingly, Shopify will send you a copy of your 1099-K form which you can access through your Shopify admin.
To access the IRS 1099-K form on your Shopify dashboard, you need to go to the Finances section. Read our article on Shopify 1099-K – Meaning, Purpose, & Who Needs to File to know step-by-step how to access 1099-K on your Shopify dashboard.
VAT and GST
If you’re selling to customers in countries that have Value Added Tax (VAT) or Goods and Services Tax (GST), Shopify can help you collect and remit these taxes. Shopify Plus offers additional features for managing international taxes.
You can configure your tax settings within the Shopify admin to automatically calculate and apply taxes to orders based on your business location, customer location, and the products you sell.
Tax Documents For Customers
In some cases, Shopify may provide tax documents to customers, such as invoices or receipts that show the tax amount paid on their purchases.
Shopify’s app ecosystem includes tax management apps that can provide additional tax-related features and reports.
How To File Taxes For Shopify Store?
If you’re a merchant, you may have to charge taxes on your sales and then report and pay those amounts to your government.
Shopify can usually handle the most frequent sales tax calculations automatically, despite the complexity of tax rules and mandates.
You may also employ tax overrides to account for unique tax rules and circumstances.
Shopify uses a variety of different default sales tax rates. If you utilize the system’s built-in rates, double-check that they’re current and correct for your particular circumstance. You have the option to modify them as needed.
But keep in mind Shopify does not collect or remit your sales taxes for you.
You must register your business with local or federal tax authorities to manage sales taxes.
You should always double-check with a local tax department or a tax accountant to ensure that you charge your clients the proper sales taxes and submit and remit the amounts accurately.
If you frequently deliver products to customers in a particular state, you may have tax liability due to the economic connection.
Now, setting up your Shopify store to correctly collect sales tax may be more complicated than you think. However, to know the complete procedure on how to collect sales tax, read our article on how to file Shopify taxes.