e-commerce side hustle taxes

What You Need to Know About Taxes for Your E-Commerce Side Hustle

E-commerce sales have been on the rise in the U.S. over the past couple of months due to the realities of the coronavirus pandemic. According to a new SpendingPulse report from Mastercard, U.S. online retail sales jumped by 92.7 percent in May and consumers spent more than $53 billion via e-commerce in April and May.

This rise can be attributed to the fact that many brick-and-mortar retailers had to move their shops online during the height of social distancing and stay at home orders. The growing number of entrepreneurs starting e-commerce side hustles is also contributing to the influx of online sales. The pandemic displaced tens of millions of people out of work, and to make ends meet, many decided to start side hustles, launching new business ventures from the safety of their homes on platforms like Amazon, Shopify and Etsy.

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So, for those who have gotten their e-commerce shops off the ground and are seeing cash flow, there’s much to learn about the seemingly daunting topic of taxes.

Here’s what you need to know:

You have to charge sales tax for e-commerce sales

First and foremost, it’s important to understand that sales tax is governed at the state level in the U.S., which means that e-commerce business owners are likely dealing with different tax laws and rules when operating within different states.

As an e-commerce shop owner, you have the responsibility to charge your consumers the correct amount of sales tax and divert the collected amount back to the states that fall within your responsibility. Currently, 45 states and Washington D.C. all have a sales tax.

Whether or not you have “nexus” in a state determines when and from which customers you need to collect sales tax. To quickly explain, sales tax nexus is the degree of an e-commerce seller’s connection to a state. If you meet certain thresholds (i.e. physical presence or a certain volume of online revenue), the seller is then required to collect and remit sales tax in the state.

Online retailers will always have sales tax nexus in their home state but can certainly have sales tax nexus in other states, depending on business activities. Once you’re deemed nexus in a state, you are legally required to charge sales tax to your consumers and remit it back to the state.

Even if you’re new to this and may not be completely up to speed on what’s required of you as an online retailer, you have to be diligent about tax responsibilities. The consequences of failing to collect and remit sales tax to the appropriate states can result in audits, fees, penalties and even criminal charges.

It’s also critical to start collecting from your customers at the beginning. You’ll be responsible for paying the amount owed regardless of whether or not you are charging your buyers for sales tax. This can easily be automated through software solutions to ensure you’re calculating and collecting the proper sales tax based on the states you’re operating in.

Related: What Entrepreneurs Need to Know About the Home Office Deduction

Internet business tax laws

Tax laws are consistently changing, and even more so now because of COVID-19. It’s important to stay up-to-date on internet business tax laws, because like I mentioned above, there are consequences for not complying.

One of the most well-known rulings is South Dakota v. Wayfair. The ruling fundamentally changed taxing remote sales by overruling a longstanding physical presence rule, which is why states are allowed to require remote sellers to collect and remit sales tax.

States with sales tax rely heavily on it. However, tax collections have nosedived as much as 50 percent in the fallout of the pandemic. Since states have the ability to collect sales tax from e-commerce revenue, they’ll be regulating this now more than ever and collecting on e-commerce sales surges.

What does this mean for you as an e-commerce business owner?

It means that states are depending on e-commerce sales tax collection more than usual, so there will be more audits, enforcement and possible litigation over the next year. Make sure you are educated on your tax responsibilities so that you can avoid any potential issues.

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Strategic ways to reduce your tax burden 

Understanding your tax obligations is an imperative part of running an e-commerce business. Working with a tax professional, such as an e-commerce CPA, can help you take it a step further by strategizing ways to reduce your tax burden. A professional can help to save you money and ensure that you don’t spend a dime more than you need to on your tax return.

The first step I typically recommend to my e-commerce clients is to become an S corporation (S-Corp). An S-Corp, for U.S. federal income tax, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. What this means for your business is that electing as an S-Corp can save you up to 15.3 percent on your tax bill if implemented correctly. What’s great about this strategy is that if you have an LLC, you can file an election with the IRS to request to be treated as an S-Corp for tax purposes even though you still have an LLC for legal purposes.

E-commerce businesses also need a firm understanding of what they are eligible to claim as a tax deduction. You’ll want to keep track of all of your expenses now so that you can claim these deductions when the 2021 tax season rolls around. It’s important to be sure to keep documentation for each deductible business expense throughout the year. This includes your internet, cellphone, software services, office supplies and more. Additionally, the IRS offers a home office tax deduction to e-commerce businesses that are run out of the home, if select criteria are met.

Another common and immediate way to save on taxes is to contribute to a retirement plan. For many retirement plans, such as traditional IRA and traditional 401(k), contributions are 100 percent tax-deductible.

Additionally, payments made after the close of the year can be deducted as long as the contribution is made before April 15 each year. For example, a contribution made on March 15, 2021, can be deducted on the 2020 tax return that’s due on April 15, 2021.

Adopting an “Accountable Plan” is also a suitable tactic. This is an IRS-approved reimbursement program that allows a business to reimburse employees for business expenses they incur as part of their work, which could include you as a business owner if you are also an employee of your business entity.

If an Accountable Plan is set up, then you can deduct those reimbursed amounts as if the business had incurred the initial expense itself. Accountable Plans also allow people who work from home the ability to deduct rent, cellphone expenses, car expenses and others.


As we all know, the pandemic has made the future of retail uncertain. Depending on e-commerce as either a main source of revenue or as a side gig to bring in some extra cash as the country tries to rebound is a smart entrepreneurial move. You just have to be careful and be extremely diligent of your tax liabilities to maintain business as usual without any hiccups.

Working with an e-commerce CPA who is aligned with your business objectives early on is an efficient way to maintain tax compliance, stay on top of your tax responsibilities, and ultimately save you money (and maybe a few headaches!).

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