One of the several requirements to sell on Shopify is that you need to declare your tax liabilities, including corporation, income, sales taxes, and potential overseas taxes if you sell internationally.
Shopify bookkeeping sounds complex, but a compatible accounting software can streamline each element of your reporting, serving as a vital management tool. If you’re setting up a new e-commerce store, it’s important to note that Shopify includes accounting services on a very basic level, so you can’t rely on the platform to cover your financial admin.
What Is Shopify Sales Tax?
When rules changed in 2018, new thresholds were introduced according to which e-commerce businesses need to collect and pay sales tax.
Your eligibility depends on your annual turnover and the caps differ between states. While some states don’t levy sales taxes at all, others require an e-commerce store to pay sales tax at the same rate as the buyer’s home state, so the calculation is not always straightforward. Shopify does not pay sales tax for you.
Platforms like eBay and Amazon are categorized as marketplace facilitators and can provide services to remit sales tax for a merchant, but this doesn’t apply to Shopify.
Which Shopify Tax Forms Do I Need?
We’d reiterate that while you can download forms from Shopify, you’ll require accounting software to deal with the bigger picture: calculating total income and expenses and overall tax liabilities.
However, you will usually need the following forms:
- Form 1040 for income tax returns
- Schedule C if you are a sole proprietor and have income or losses to report
- 1099-K, issued by Shopify for merchants turning over $20,000 a year or over 200 transactions
While Shopify will produce the 1099-K, you must still verify whether the information is correct, as this needs to match your tax return. The platform will normally issue the report to the e-commerce business and the IRS (for merchants over the threshold). Still, it isn’t responsible for completing your tax returns filing–it’s more of a backup to ensure online retailers aren’t under-declaring.
Can a Shopify Accounting App Automate My Tax Filing?
To an extent, yes, e-commerce accounting software that integrates directly with Shopify will extract all the essential metrics and sync these with your reports. You can then produce your tax returns, check if the information is accurate, and submit them to the relevant tax office. Automating the data feed can reduce your bookkeeping workload substantially, carrying out functions such as:
- Categorizing sales and expenses into the relevant codes
- Producing mandatory forms and filing documents
- Calculating tax liabilities and the appropriate rates
The benefit is that your accounting system will provide a level of compliance assurance, highlighting when your sales tip over a tax threshold and issuing reminders when you have an outstanding liability to pay.
Is a Shopify 1099 Reliable and Accurate?
The reports you download from Shopify are normally precise, with one major cause of concern–they can only include data on the transactions conducted through your Shopify account, whereas many e-commerce businesses sell on multiple platforms and channels.
It is also important to manage your settings, because tax rates vary between locations and automatic tax calculations are only as accurate as the specified rules. The easiest approach to declaring your income and matching your revenue with multiple 1099 forms is to combine them using one accounting package. You can report your total non-employment earnings and keep 1099 copies as part of your audit trail should you ever need them.