“Death and taxes.” This rather gloomy phrase illustrates that taxes are a certainty in life. You can only avoid them for so long before they finally catch up to you. The problem is that many people don’t know where or how to get started doing their taxes. That’s not to mention taxes from online sales, like Amazon FBA taxes.
However, once you have a better idea of how taxes work, it’s easier to incorporate them as another part of your business’ daily logistics. Here are some important considerations you should make when it comes to your Amazon FBA taxes. These should provide you with a good starting point to understand this particular form of taxation.
How to know whether you should file taxes
First, a terminology lesson. You’ve probably come across something called a “sales nexus.” This is just jargon for when your business has a presence in a state. In Amazon FBA terms, this means that your products are held in a warehouse within a state that has sales tax. It also refers to the state that is your “base of operations” or where you work from.
You should be registered for, and pay taxes, in each of the states where you have a nexus including your own. Amazon has warehouses in 22 taxable states, which means you might need to comply with various states’ sales tax rules. This article by Taxjar can help you through this process.
You can find a lot more here on the specific information Amazon requires from you as a seller and what filing you need to do. Amazon, as a third party, is required by law to file a 1099-K form for sellers who generate more than $20,000 in sales or make more than 200 sales. Sellers smaller than that need to file it on their own.
Non-U.S. sellers must complete a a W-8BEN form and send it to Amazon.
It all starts with your accounting
You will find it very hard to stay profitable or have a full picture of your financial status if you don’t have a good accounting system in place. Here are some of the things you should be tracking:
- Exactly what you sell
- How much you sell it for
- What’s left after Amazon charges their fees
- In which states you sold your products
Knowing this data, you can then integrate taxes into the full picture.
If you’re not already, you’ll need an accurate understanding of your financial situation to decide whether to become compliant. Additionally, you’ll need it in the event of an audit and to pay back outstanding taxes. This also goes for the possibility of selling your business later on.
Going compliant vs. staying noncompliant
If, for example, you decide to become compliant, you need to know whether you can afford to pay all your outstanding taxes in one go or over a period of time (this will include interest). Or decide if you are better off being compliant from now on and hope you don’t get audited for the time prior to your compliance.
You can also stay noncompliant. However, the longer you don’t pay your taxes, the bigger the bill will be once the authorities catch up with you. If your unpaid taxes are already enough to sink you (should you be forced to pay them), you will need to make a tough decision. Being noncompliant can also hurt your chances of selling the business later on. In addition, noncompliance is a liability if you are trying to build a real brand.
If you are stuck between a rock and a hard place like this, it might be worth it to consult a professional tax agency. They are not obligated to enforce tax laws and can help you with unbiased, professional advice. They will provide you with a risk assessment based on your business. You can also explore the different avenues of dealing with your out-of-date taxes.
The possible consequences of being noncompliant
If there is a lesson that too many people seem to not yet have learned, it’s that the tax man always catches up to you one way or another. As such, there are various ways you can end up paying for your noncompliance. And these come with differing degrees of punitive measures.
We already discussed this in the previous section, but if you aren’t tax-compliant, it will become a problem should you want to sell your business at some point. The new owner will inherit your tax liability along with your business. Furthermore, you can expect it to eat a hole in your business’ evaluation.
Secondly, if the IRS discovers that you have not been reporting taxable income, they might pursue you for back taxes. They’ll expect you to reimburse them for the taxes you owe and may impose a penalty fee depending on the severity of the circumstances. Amazon is reportedly going to step up efforts in the future to report sellers to the IRS. So, the taxman might be coming for you sooner than you think.
Lastly, if you have been collecting taxes but have not been reporting or paying them, that is a criminal offense.
Getting help with your Amazon FBA taxes on sales
As you can already tell from the previous sections, sales tax can potentially be a very complex issue. You have to balance the tax laws and regulations of multiple states. Not to mention, you’ll need to account for your own business interests and the possible outcomes of moving forward.
Just figuring out how much taxes you need to pay in the first place can be a nightmare! Tools such as Taxjar and Taxify can help you determine the amount of taxes you need to pay or collate the data on your taxable sales. From here, you can either file the taxes yourself or have an accountant do it for you.
If you don’t have an accountant but feel intimidated doing it yourself, you can hire tax/accounting services such as Catching Clouds or Bench. These agencies tend to be more informed when it comes to online sales tax than everyday accountants.
There is such an endless web of possibilities that it will be impossible for us to cover non-taxable products here. Products that are usually taxed can be non-taxable when they are sold to certain institutions and employees of certain professions. It also depends on the state in which you sold them.
For example, in some states, baby formula is a nontaxable product. In others, selling computer equipment to teachers might be nontaxable.
If you’re already struggling to keep your head above water, it might be hard to determine this eligibility for every single one of your items. However, it pays to do some research and find out which of your products are non-taxable. If it looks like it could make a significant difference to your bottom line, you should consider hiring an accountant or accountant services to look into it.
Make sure you’re ready when the tax man comes
We hope that this article has given you a broader perspective on the considerations that have to be made when regarding taxes related to Amazon FBA. As your business grows, dealing with your Amazon FBA taxes in an efficient, accurate, and legal way will become increasingly important. Seller’s Playbook can help you navigate these tricky waters. The sooner you start the easier it will be.