Income Tax

FAQs about IRS Tax Regulations on Online Entrepreneurs

Does Tax-free Work Online?

If you are an entrepreneur having an online presence instead of a physical location can save you a pretty penny when it comes to taxes on rent, utilities and sometimes sales. But there are certain taxes online merchant stores can’t escape.

It is vital you understand internet business laws to comply with government regulations and avoid penalties or a shut business. Understand your tax responsibilities to avoid getting bogged down by tax-induced stress,

Also for the online shopping lovers get your shopping facts right. You need to know how to escape the sales tax when shopping online and when the taxes are a must-compliance.

FAQs about IRS Tax Regulations on Online Entrepreneurs
FAQs about IRS Tax Regulations on Online Entrepreneurs

Do you still pay taxes if you own online business?

Internet businesses have largely been exempted from paying retail sales taxes in most states unless they also operate a brick and mortar store. But some states have adopted taxes to include online business.

  1. Income tax:

All types of businesses are required to pay income tax including the smallest online store. Even though online businesses can “fly under the radar” when it comes to income tax, it’s illegal and can result in investigations by the IRS (Internal Revenue Service).

  1. Sales tax:

Sales tax on taxable goods applies to brick and mortar businesses which are paid to the state. But some states require online businesses to do the same. But other states consider online retail merchants as a type of mail-order business and do not require sales taxes. To be on the safe side find out what are the sales tax laws for online businesses in your state.

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FAQs about IRS Tax Regulations on Online Entrepreneurs:

  1. Do you operate your online business from home?

Most online entrepreneurs operate their businesses from their homes and this entitles them to significant tax deductions if they meet the IRS conditions. First, your home office must be exclusive for business use. Space should not be used for personal or family activities.

Second, your home office must be your principal place of business. The business you conduct in your home office should not be conducted in a rented space. If you meet these requirements you are exempted from taxes on utility bills, property taxes, insurance costs, rent or mortgage payments.

  1. Do you outsource work for your online business?

If you outsourced independent contractors in the recent past to work on your online business, you are exempted from paying Medicare, social security or unemployment taxes. But if you hire full-time employees, you have to cover all those expenses. For this reason, most online businesses prefer to work with independent contractors.

Can you shop online and avoid sales tax?

Shopping online is a great way to avoid paying sales tax as your chances of buying an item from a merchant in a different country or state are great. So how can you skirt sales taxes when considering an online shopping spree?

  1. Opt for a company with a foreign physical address:

Consider a company that is in a different state compared to your physical location. To avoid taxes when shopping online it is essential you choose “out of state” shopping platforms. Visit the store’s website and check out their shipping page to confirm their physical address.

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But nowadays there are instances where you’ll still pay taxes when you order items online from a seller who’s out of state.

  1. Shop at online platforms with individual sellers:

Consider shopping at resale sites such as bestreviews.guide or eBay. These websites feature most items sold by individuals rather than companies and you get to buy single pieces instead of bulk items.

Small retailer sites such as Newegg.com only charges taxes in New Jersey, California and Tennesse. If you are not from one of these three states you can escape sales tax on your purchase.

Shopping at small merchant sites guarantees you of tax-free sales. However, corporations or companies that sell via eBay can still charge you sales taxes. Small independent online retailers are your go-to choice and for good reason. They lack a physical address in many states.

Be aware of your shipping address:

Do you know if your current state or country is tax-free or not? Your physical address will decide if you go scot-free from the tax man or you pay up on taxes. In case your physical address makes you liable to sales tax, you can consider getting an alternate address for a different location. This is to avoid paying taxes on the items you buy online.

  1. Shop at websites with distinct online vs. in-store business:

Shop on sites with separate online and in-store business addresses. These companies such as Borders and Barnes & Noble among others do not incur sales tax to their customers due to their specific tax arrangement with the government.

  1. Read the website:

Numerous online shopping platforms make their sales tax policy clear on their websites. There are some cases where you have to wait until checkout to know whether or not you will pay tax. Often the website will inform you or add the tax to your item when you check out.

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What situations are exempt?

Certain circumstances allow you to sidestep sales taxes:

Certain items: some items are exempt from sales taxes such as purchases of food, clothing, medical devices, and medical prescriptions.

Use exemptions: items intended for specific uses are exempted from sales tax. These include items to be used for industrial processing, agriculture or manufacturing.

Certain buyers: some buyers are immune to sales taxes being levied on their purchases. These include non-profit companies, churches, schools, governments, and other qualifying organizations.

NOMAD states: the easiest way to avoid sales tax is to relocate to a NOMAD state: New Hampshire, Oregon, Montana Alaska and Delaware (the NOMAD states). These five states lack a sales tax and online purchases do not attract sales taxes.

Bottom line:

When the dreaded tax season approaches, the collective groan from entrepreneurs is all familiar. And online businesses are not left behind. Be aware of what taxes you have to pay when you own an online business or when you’re an online shopper.

 

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