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Beginner Basics: Everything You Need to Know Setting Up Shopify Taxes

Michael Pignatelli
Last Updated on September 28, 2023

Shopify is another excellent online platform where you can start your ecommerce business. Shopify has different programs and features that help small businesses reach potential customers to make sales and pave their way to business success. But, of course, as you reach more buyers and earn more, you shouldn't forget about your obligations: taxes. 

Paying and sorting your taxes is a tedious part of owning an ecommerce business, and since you run the business yourself, there are no people that handle the taxes for you. If you're a newbie in the ecommerce market, familiarizing yourself with the taxes of selling platforms and how to set them up is essential for your success. 

Neglecting your taxes can be the start of your business's downfall. So if you want to grow and succeed in Shopify, here are some beginner basics you should note when it comes to Shopify’s taxes. 

ecommerce tax 

What are my tax obligations in Shopify? 

When you start a selling business, whether you have a physical store or an online selling profile, all the items you sell are levied with taxes according to your government's law or the selling platform's policies. 

If you are planning to start selling on the Shopify platform, here are some of the taxes you should note. 

Sales tax 

Sales tax is levied on every tangible item you sell in your ecommerce business. For example, have you ever gone shopping for groceries and noticed that there's an additional sales tax in the receipt once you get out your goods? That's exactly the situation with the items you are selling. As a Shopify seller, it's your duty to collect sales taxes and remit them to the proper tax collection agency. 

But, before you start to collect sales tax for your goods, you should have the correct rate applied to your items. If you are selling your products from the United States, the sales depend on what state you are located in. For example, if your merchandise is in New York, there's a 4.25% sales, while in Los Angeles, it's 9.5%. So make sure to know the proper state tax rate to collect the proper taxes. 

Income tax

Your total income from the platform and other earned money is levied with an income tax at the end of the fiscal year. There are seven different tax percentage brackets in the United States you can fall under depending on how much your income is. If you earn $10,000, you are levied with a 10% tax, and as your income goes higher, the percentage rate also increases. 

You will have to file an income tax return to know the final tax payment. Income taxes can also be confusing, and filing wrong can incur penalties. If you're new to all of this, it is best to hire a professional accountant to keep up with your income taxes. 

Getting Started: How to set up taxes on Shopify?

To collect the proper sales taxes and keep on top of your tax obligations, you have to set up your taxes in your Shopify admin account. Here are the important steps to follow when setting up your taxes in Shopify. 

Create your shipping zone 

When you set up your Shopify admin account, you must determine your shipping zone. There are different rates of shipping taxes across different states. Make sure to select the regions you will potentially ship your items so the platform can add the corresponding shipping rates once your customer checks out their item. 

Set up automatic tax rate collection 

Setting-up automatic tax rate collections will be helpful for the collection of taxes. The platform will automatically add the amount of taxes when your customers check out. But before you can set up, you now have your sales tax nexus. To calculate the sales tax, you must first determine if your business is destination-based or origin-based. 

Destination-based depends on tax calculations on the location of your customer. While the origin-based depends on tax calculation on where the items are coming from. You have to check which category you fall in with your state laws. 

Set-up tax exemptions 

Some items are eligible for tax exemptions. In some cases, exemptions are mandated by the national government, but some states give tax exemptions to some products. For example, any footwear product less than $50 is exempted from taxes in Connecticut. 

These exemptions can change from time to time, so it's important to keep updated with these tax law changes to apply for the following exemptions. There are also local tax professionals who can help you with these exemptions to help you properly collect your sales tax. 

taxation software and services 

Keeping Track of Your Taxes 

Now that you know how to add taxes on Shopify, it’s also important to keep track of your collection to know if you’re doing it right. Here are some practices that can help you manage your taxes on Shopify. 

Shopify tax report 

Everything is recorded under your seller's profile whenever you collect a sales tax and your total earnings. Take advantage of your transaction records to organize your taxes. You can download all your financial reports from shipping, sales, and taxes. 

Use Shopify plug-ins 

There are plug-ins compatible with Shopify to help you keep track of your taxes. For example, applications like TaxJar and Quaderno can automatically collect and summarize all your financial transactions and keep and organize records you can use for your filing process. In addition, there are several softwares you can integrate into your Shopify account, like Quickbooks, that record your sales and help you keep track of your inventory. 

Use the software to simplify the taxation aspect of your business to help you get organized and be on top of your taxes. 

Hire professionals 

If managing your taxes is simply too much and too confusing, you can hire tax professionals to handle it for you. When it comes to a reliable professional, Unloop can help you with your ecommerce business. Our tax professionals can help you manage your sales tax to help collect the remit properly. We also have professional bookkeepers that can help you manage all your financial transactions and inventory. 

Rest assured, these professionals can handle all your tax needs and help you strategize and make plans to help your business grow further. 

Final Thoughts 

Creating your seller account and deciding on the trendiest product to sell on Shopify are the easier parts of starting your ecommerce business. Keeping the financial records, keeping up with your product inventory, and managing your Shopify taxes are much harder, but all essential to the growth and success of your business. We hope the overview of the taxes helps you better understand your tax obligations and help you set up your taxes on Shopify so that you can sell your products smoothly and properly. If you are in need of professional help, don’t forget to book a call with us now!

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About unloop

Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.