This guest post is brought to you by Outright.com, an alternative to Mint for business and Etsy’s preferred bookkeeping provider.
When you’re first starting out with a small business you tend to have stars in your eyes. Everything is so new and exciting – after all, you’re setting out on your own, making your own way! Why worry about anything?
This bright eyed excitement gets you through the initial difficulties of the early years of owning a business. There is so much to think about you never realized. One of the big things you’re going to face is sales tax.
If you live in a state that has sales tax you already know it exists, but you may not know how it works. It’s one thing to pay it, but yet another to work it into your business! Here’s a quick 101 on sales tax that will keep you in the know and compliant with the government.
What It Is
Sales tax is just like any other tax in that the government collects it for some purpose, like fire, police, roads and schools. Some states don’t have sales tax as they’ve found other ways to pay for the things they need. However, most states require merchants to collect some form of sales tax.
Basically, when you buy an item at a store, there’s a certain percentage added on to the total that goes to the government. How much that is generally is up to the government in control of it – usually state, but sometimes counties and cities have their own percentages. This percentage is added onto the purchase and you pay the total.
For businesses, the “fun” doesn’t end there. After they collect the sales tax they have to report that to the government. The total amount of sales tax they collected is tallied and sent in as one payment, either monthly, quarterly or annually.
What You Need To Do
The very first step you must take before you collect any sales tax is to figure out from which buyers you need to collect sales tax. Most online sellers only need to collect sales tax from buyers within their own state. But if you have “nexus” (i.e. some sort of physical presence) in another state, then you need to collect sales tax from buyers in that state, too. More on figuring this out in a moment.
The next step once you’ve determined where you need to collect and remit your sales tax is to actually set your business up as a business. This involves registering your business with the state and/or local government. This way, they know you’re in operation and can track how much sales tax you’ve collected. (Don’t confuse this with registering as an LLC or other corporation. You can be a sole-proprietor but still need a sales tax license.)
The next step is to set up a business account for your new company. Some business owners try to run their company through a personal checking account, but this is a very bad idea, especially when it comes to figuring out things like sales tax. It can be entirely too confusing, so we highly recommend setting up a separate business bank account.
After this, it’s time to do some research! You have to know all the different sales tax rates that actively affect your business – county, city, state, etc. Read up as much as you can about them so you don’t accidentally collect too much or too little, or miss an important sales tax deadline and get stuck with a hefty fine. We’ve created a handy guide on Outright.com: Sales Tax Resources for Online Sellers in Every State.
How to Collect Sales Tax
Depending on what platform you sell on, you can generally set up automatic collection of sales tax. Here’s a guide on setting up sales tax within the Etsy platform.
From there, you must keep close track of how much sales tax you have collected and when you must remit it to the government. Be sure you’re not late – many states will penalize you steeply. Also keep in mind that most states require you to file by your given due date even if you haven’t collected in sales tax in that taxable period. Be aware!
One tip: grab a free Outright account and let us track your sales tax for you! Every free Outright account comes with a sales tax calculator, which can help you track sales tax collected, remember to remit it, and solve many of your sales tax woes in no time flat.