Tax Tips for New Ecommerce Entrepreneurs
By Stephen Nelson
New ecommerce entrepreneurs can find them confused and confounded by the tax and
accounting requirements of their venture. And that’s a shame: If someone’s spotted
a great new category and successfully built a web presence, heck, that someone shouldn’t
find themselves bogged down with the accounting minutia. The entrepreneur should
focus on increasing traffic, expanding margins, and growing cash profits.
With that in mind, I offer up the following tax and accounting tips:
Tip #1: Don’t Incorporate
A true corporation—whether a C corporation or an S corporation—saddles your business
with more complicated tax accounting and a bunch of state filing requirements. You
don’t want to deal with this redtape—or at least not until you’re profitable.
Instead, operate your business as a sole proprietorship. If you’re concerned about
legal liability protection, note that you can setup a one-owner limited liability
company, or LLC. A one owner LLC is treated as a sole proprietorship for income
Tip #2: Start Your Business Before Making Investments
Expenditures you make before you’re actually in business-in other words, before
you’ve got a business license and before you’re selling or trying to sell your stuff—aren’t
Specifically, you can probably deduct the first $5,000 of these expenses. But any
amounts in excess of the $5,000 must be amortized over the next fifteen years.
What this means is that you want to start your business before you start spending
money on advertising, training, web development, accountants and lawyers and so
Tip #3: Automate Your Bookkeeping & Accounting
By law—and some people don’t know this—you’re required to maintain an accounting
system that lets you clearly measure your income. As a practical matter, this means
you need to use a product like Quicken or QuickBooks.
But you ought to go one better than simply using desktop accounting software. Make
sure that you’re taking advantage of online banking and bill payment features which
integrate your accounting system with your banking. As much as is possible, for
example, you want to be able to move money from PayPal to your bank to QuickBooks
simply by typing a few keys or clicking your mouse a few times.
Tip #4: Hire a Payroll Service Before Hiring Employees
Many successful ecommerce business owners can run their operations without employees.
And if that’s true for you, hey, congratulations. If and when you do need employees,
however, don’t try to handle the payroll yourself. Oursource the payroll to one
of the large payroll service bureaus like ADP, Payroll, or QuickBooks.
These services are expensive. Figure $1000 to $2000 per year. But the services let
you avoid the bookkeeping nightmare called payroll and prevent you from getting
into payroll tax trouble.
Tip #5: Consider S Corporation Status After You’re Profitable
I’ve written and talked much about how S corporations save taxpayers money and how
the right way to set up an S corporation is first create a limited liability company
and then ask the IRS to treat the LLC as an S corporation for tax purposes.
Let me review the basics here again, however. Suppose that you’re making $90,000
a year off your web site. If you just treat your business as a sole proprietorship—or
an LLC treated as a sole proprietorship—you might pay $12,000 in income taxes on
the $90,000 and then another 15.3% self-employment tax, or roughly $13,500 on the
If you set up an LLC and have the LLC treated as an S corporation, you’ll still
pay the same $12,000 in income taxes. But you’ll only pay the 15.3% self-employment
tax on that portion of the profit that you categorize as wages. If you categorize,
say, $50,000 of the profits as wages, you’ll pay $7,500 in self-employment taxes.
(The other $40,000 in remaining profits, by the way, gets paid out as a dividend-like
Note, then, that the S corporation saves you roughly $6,000 every year. Sweet, right?
Texas LLC formation expert Stephen L. Nelson CPA has written more than 150 books.
Formerly an adjunct tax professor at Golden Gate University, Nelson is also the
author of QuickBooks for Dummies.