How To Handle Taxes for Your Online Business (6 Easy Tips)

If you’re running a side hustle, you’re probably juggling a million things already, so you need your business finances to be as simple as possible. It may seem overwhelming when you first learn how to handle taxes for your online business.

But by mastering a few key habits that you practice throughout the year, you can save yourself time and headaches when it’s time to file. We’ve collected 6 easy tips to help you prepare now and take the mystery out of business taxes.

1. Track Your Money

As an online business owner or side hustler, you’ll want to keep good records of the money you earn, the money you spend, and exactly what you spend it on. Good news — you do not have to use complicated tracking methods. You can use pen and paper, a homemade spreadsheet, or a free app like Wave. The more your business grows and gets a bit more complicated, the more you’ll benefit from investing in legit accounting software like Quickbooks. 

The best method is the one you will actually use because it makes sense to you. The real secret is to use it faithfully throughout the year. By tracking every single dollar earned and spent along the way, it will be easy to find the detailed information you’ll need each year.

2. Keep Business Expenses Separate

One of the biggest favors you can do for your online business is to keep your business and personal finances separate. Get a separate business bank account and credit card for your business transactions. This reduces the possibility that you’ll miss a deductible expense because it’s buried on your bank statement between pizza night and dog food purchases.

3. Know Your Business Structure

Your tax liability depends in part on the type of business ownership you set up, like a sole proprietorship, an S Corp, or an LLC. Each entity falls under slightly different tax rules. 

When you first begin operating your online business, it can be helpful to research the pros and cons of different business entities to determine which one is best for your business.

4. Understand Your Deductions

Expenses like office supplies, website hosting fees, the cost of training, subscriptions to software you need to do your work — all these and much more can often be considered “ordinary and necessary costs of doing business,” which is how the IRS defines a deductible business expense.

Deductions usually fall in categories like office supplies and equipment, vehicle mileage, application subscriptions, advertising, and employee income. It’s pretty straightforward, so if you find yourself spending a lot of time scrutinizing an expense, it probably doesn’t qualify. 

For example, you probably can’t deduct the cost of your new pasta maker unless it’s related to your cooking blog. Your new camera isn’t business equipment unless you actually use it for work.

Here are more common deductions for online businesses:

• A freelance writer may be able to deduct the cost of a new laptop, online training courses, and subscription fees from a grammar app.
• An e-commerce business owner might have expenses like warehouse rent, accounting software, and shipping costs.
• Bookkeepers may be able to deduct the cost of continuing professional education courses, internet services, video conferencing subscriptions, and bookkeeping applications.

5. Set Aside Money for Taxes

By setting aside a portion of your income each month specifically for taxes, you will be better prepared when April rolls around. If you’re not sure how much to set aside, start with 25-30%, and lean toward the higher end if your state requires you to file state income tax.

If it’s possible you will owe $1,000 or more in taxes for your business, you’ll need to make quarterly estimated tax payments. This means you pay in advance for the taxes you’ll owe the following April. 

After your first year in business, you’ll have a good idea of how much you need to pay in estimated taxes, but you can use free online calculators to help you pinpoint the amount to pay. The amount is based on a quarter of what you’re likely to owe for the whole year, and the payments are due on specific dates in April, June, September, and January of the next year.

If you underestimate the amount you’ll owe, you’ll simply pay that by the tax deadline for the year in April. If you overestimate, instead of getting a refund, consider having the overage applied to next year’s estimated taxes.

6. Don’t Be Afraid To Ask for Help

Whether it’s hiring an accountant or reaching out to fellow entrepreneurs for advice, there are plenty of resources out there to help you navigate the tax maze. You may even want to schedule regular check-ins with a tax professional. 

Even if you handle your taxes independently, a brief consultation can help you get answers to common questions, ensure compliance, and identify potential deductions you may have missed.

Tools To Help Me Handle Taxes for My Online Business

In our experience, these are some of the best software tools to use to track your small business expenses and prepare you for your taxes.

• QuickBooks is one of the most well-known accounting software platforms. It offers expense tracking, invoicing, payroll, and financial reporting. QuickBooks can sync with your bank accounts and credit cards to automatically categorize transactions, making it easier to track expenses for tax purposes.
• Expensify’s user-friendly expense management app simplifies the process of tracking business expenses. You can use it to capture receipts, track mileage, and categorize expenses using customizable tags. Expensify also integrates with accounting software like QuickBooks and Xero for seamless data syncing.
• Wave is an accounting and invoicing software platform that’s popular with freelancers and webpreneurs because it’s free and easy to use. It offers features such as expense tracking, invoicing, accounting reports, and receipt scanning.
• Xero is a cloud-based accounting software solution that offers comprehensive features for expense tracking, invoicing, bank reconciliation, and financial reporting. It might be more complex than you need if you’re first starting out, but it’s a real time-saver as you expand your business.
• MileIQ app automates the process of logging business miles driven for tax purposes. With its intuitive interface and integration with mobile devices, MileIQ takes the hassle out of keeping track of your business travels.

How Do I Handle Sales Tax

If you run an e-commerce store like Shopify, the sales tax you collect from buyers depends on several factors. First, you’ll need to understand the concept of nexus, which is the intersection of a business that makes money and the tax rules of the state where the business operates.

You must collect sales tax for each state in which you have nexus, which is triggered by circumstances like storing inventory in a state, having an employee who lives in a state, and more.  

It’s best to talk to a tax pro before you launch your online store so you understand where you have nexus and how much sales tax to collect. You may also benefit from apps that help you calculate and collect sales tax automatically.

How To Handle Taxes for Your Online Business : The Final Word

Handling taxes for your online business can be confusing, especially when you’re just starting out. By proactively keeping accurate records, setting aside money for taxes you’ll owe, and staying informed about deductible expenses, you’ll be ready.

Remember, all business owners must report their income. As your business grows, your tax needs may change. You can find all of this information for free on your own, or you can invest in a comprehensive course, like Brilliant Bookkeeper, to learn the necessary bookkeeping and tax skills you need for your own online business. If you’d like some help, you can periodically consult with a tax professional to ensure the long-term success of your online business.