3 Accounting Tips For Online Sellers
In 2019 a study that surveyed 1085 managers and owners of US small businesses found out that 41 percent of this population do everything themselves. When you are a small business there is a misconception that you don’t need a dedicated accountant. Especially an eCommerce business which can easily be run by a few people. Unfortunately, 28 percent of small businesses will receive an IRS notice and be audited. Those are not good odds.
As your business grows, you will encounter new situations, the novelty of which will reflect in your books. Sooner rather than later, your books will be a mess as your finances get more complicated. As transactions get more complex, they need to be properly categorized and reported to tax authorities. The different categories will have different tax consequences that will either increase or decrease your tax liability.
Tackling your finances without an established standardized accounting system will easily overburden you. If you don’t properly categorize your data now, could end up paying more tax than you need to. You could also miss some great tax credits that could apply to your business.
Not everyone can sit and unravel the tangle of financial data your business is endlessly churning. You need someone who will not just record your data, you need an accountant who can analyze them and make practical applications of this information. Proper accounting is important, but it’s a difficult dilemma. In this article, we provide you with 3 best practices in eCommerce accounting.
Be aware of tax updates
Probably one of the biggest changes for eCommerce is in sales tax. Since 2018 physical presence is no longer necessary to be liable to collect and remit sales tax. Even if you have no physical nexus, if your transactions reach a certain threshold or your sales hit a certain amount, you can qualify for what’s called an economic nexus. This triggers your liability to collect and remit sales taxes to the State where you have these substantial transactions.
The standard threshold is taken from the landmark case of Wayfair which ruled that States can mandate businesses without a physical presence with more than 200 transactions or $100,000 in-state sales to collect and remit sales tax. In each State, these criteria have evolved and you need to be aware of them. There are two categories that you should look out for, State-level sales taxes and local sales taxes.
Source: Tax Foundation
There are also some other things you need to remember when it comes to taxes:
- Impose correct tax rates
Make sure you impose the correct tax rates. Talk to your local accountant to be sure of the rules behind the sales tax application. What you also need to consider is how your eCommerce platform calculates taxes. You can either add all sales taxes manually or have them automatically calculated. The latter leaves little room for error.
- Set aside money for your estimated quarterly business taxes
If your business normally owes more than $1,000 in taxes at the end of the year, you are expected to make quarterly estimated tax payments. The IRS calculates these estimates based on the last return.
- File sales taxes
Be sure you have a proper record of your collected sales tax for every customer invoice. These records will eventually have to be filed with the local tax jurisdiction typically around the middle or end of the month.
Properly record Returns and Chargebacks
Customer returns and chargebacks are different expenses that need to be properly categorized.
In eCommerce, there needs to be an established return policy. For example, if you have a Store Credit, record the original transaction as an expense and add it to the accounts payable list. When it returns to you, it is categorized under “Returns and Allowances” which is subtracted directly to your revenue.
Store Chargebacks happen when a customer disputes a transaction claiming it was fraudulent. Basically, the customer tries to gain back his money from a legitimate transaction by filing a chargeback. This “friendly fraud” makes up 40 to 80 percent of all losses from e-tailers. Chargebacks are also accounted for under Returns and Allowances.
Clean and Clear Books
Maintaining your books could be one of the most tedious things you could do in your life. But clean and clear books are also a factor in financial success. It could even be a growth driver. Your financial reports need to be organized to tell the complete financial story of your company.
Proper documentation will also help you out during tax season. I mean, your accountant will find solutions for you, but they can only implement what is properly recorded. So keep your documents such as:
- Receipts, bills, and invoices
- Canceled and bounced checks
- Previous tax return
- W2 and 1099 forms
- Bank Account, debit/credit card statements
- Revenue records from your eCommerce platform
All these documents should be kept for at least 3 years.
Since you are in e-business, it only makes sense to avail of the technology available to you. Use cloud-based accounting software like QBO and Xero which provide a seamless process from recording your transactions to generating financial reports. Of course, as advance as these platforms are, the information they provide will only add value to your business if you have a financial expert to translate the data. This is where your local accountant comes in.
Here at Mehanna Advisors, we provide experts with experience laser-focused on eCommerce to interpret industry trends and government regulations to provide you with meaningful recommendations that make sense for your business.