How To Prepare for Tax Season: Tax Prep for Ecommerce

Tax season can be a familiar scramble—tracking down receipts, looking up unfamiliar tax laws, and incorporating tax bills into your cash flow forecasts. With the right approach, however, you can turn this annual obligation into an opportunity to examine your financial position. 

When you take the time to prepare, you can minimize your business’s tax liability, reduce the risk of penalties, and reveal insights into profitability and cash flow. Early preparation is particularly important for ecommerce business owners: Online sales often introduce added complexity, from payment processor reporting to multistate tax obligations.

This guide explains what ecommerce businesses need to watch for at tax time and how to prepare for tax season with confidence.

When is tax season?

Broadly speaking, tax season in the United States runs from Jan. 1 through the federal filing deadline for individual tax returns on April 15 (unless it falls on a weekend or holiday). This applies to sole proprietorships and single-member LLCs, where business income is reported on your personal Form 1040. If your business is taxed as a partnership or an S corporation, it’s required to file a federal information return—which reports income passed through to the owners—by an earlier deadline, typically March 15.

Most states require both business owners and certain business entities to file state income tax returns. Although filing deadlines often align with federal timelines, state rules aren’t always the same. Some states impose additional entity-level taxes or filing requirements. Be sure to account for state obligations when preparing your returns.

What happens if you file your taxes late?

If you expect to miss the filing deadline, you can request an extension. Individuals file Form 4868 to extend a personal income tax return, while business entities such as partnerships and S corporations file Form 7004 to extend their federal business returns. However, an extension to file is not an extension to pay for individual filers. Any tax owed is still generally due by April 15 to avoid interest and penalties. 

If you miss the deadline without filing an extension, the Internal Revenue Service (IRS) may charge a failure-to-file penalty, which is generally more severe than a failure-to-pay penalty. Interest may also accrue on unpaid balances. There is no penalty for filing late if the IRS owes you a tax refund, but you won’t receive it until you submit the return.

Ecommerce-specific tax considerations

• Form 1099-K and payment processing
• Multistate and online sales tax
• Digital product taxability
• International sales and VAT

Tax obligations can be more complex for an ecommerce business that sells across state or national borders than for a brick-and-mortar shop that only sells locally and collects sales tax at the register. 

The following areas most commonly impact ecommerce businesses during tax season:

Form 1099-K and payment processing

Form 1099-K reports the gross amount of payment transactions processed by third parties, like credit card providers, for your store during the year. 

Shopify Payments, PayPal, or other payment processors will send this form to both you and the IRS once specific reporting thresholds are met. If the state where you file your taxes has its own 1099-K reporting threshold, your payment processor may issue you a 1099-K—even if you don’t meet the federal threshold. Reporting thresholds for Form 1099-K can change from year to year, and in practice, most businesses learn they’ve crossed a threshold when they receive the form from their payment processor.

The IRS uses this form to verify that the revenue reported on your tax return aligns with the total payment volume processed on your behalf. Because the form reflects gross transactions—before refunds, fees, or expenses—it may differ from your taxable income. However, if the business income listed on your tax return is lower than the amount reported on your 1099-K without proper documentation, it may increase the risk of an audit.

Multistate and online sales tax

In the past, you generally had to collect sales tax only in states where you had a physical presence, such as a warehouse or office. Today, “economic nexus” laws mean you may have to collect and remit state and local taxes in any state where you exceed a certain sales volume or transaction count, even if you operate entirely online. These thresholds vary by state and can change over time.

For example, a California-based ecommerce business may have to collect sales tax on customer orders shipped to Florida, New York, and Texas. Failing to collect these taxes from customers means you might have to pay them out of your own pocket later. Shopify merchants can use automated sales tax calculation and collection to apply the correct rates at checkout. This ensures you remain compliant with thousands of state and local jurisdictions. You can also sign up for Shopify Tax, which lets you set up automated tax filing.

Digital product taxability

Sales tax rules that apply to digital goods—like ebooks, art downloads, or online courses—vary by state. Some states view digital products as tax-exempt services, while others tax them exactly like physical goods. 

To remain compliant, you need to configure your tax settings so digital downloads are treated differently from physical shipments where required. Failing to do so can result in under-collecting tax, which may leave you responsible for the difference later, or over-collecting tax, which can create refund and customer-experience issues.

International sales and VAT

If you sell to customers in Europe or other international markets, you may be responsible for value-added tax (VAT) or goods and services tax (GST). Unlike US sales tax, which is typically added at checkout, VAT is often included in the list price shown to customers. 

International tax obligations can vary by country and may apply once certain thresholds are reached. Ignoring these requirements can result in your goods being held at customs or your business facing fines and penalties. For Shopify users, Shopify Tax simplifies VAT compliance with features like threshold tracking and VAT invoices.

How to prepare for tax season

1. Assemble a qualified team
2. Gather revenue and sales records
3. Compile and categorize business expenses
4. Reconcile your inventory
5. Review personal pass-through deductions
6. Maximize retirement contributions
7. Verify estimated tax payments

Preparing for tax time helps you organize your financial life and protect both your business and personal assets. With accurate records and the right tools, you can provide your tax preparer with a complete, organized file that maximizes your tax refund or minimizes what you owe.

1. Assemble a qualified team

When it comes time to file, DIY tax software works for some businesses. Ecommerce business owners often face more complexity. Missed deductions, misreported income, or sales tax errors can be costly. A certified public accountant (CPA) can provide tax advice specific to your tax situation, help you navigate complex tax laws, and represent you before the IRS if questions arise. Here’s how to choose a tax professional:

• Choose relevant expertise. Look for a CPA or tax preparer with experience supporting ecommerce businesses, particularly with sales tax and multistate reporting.

• Prepare your records before handoff. Organize your sales reports, expense categories, inventory counts, estimated tax payments, and personal deduction documents in clearly labeled folders.

• Share materials early. Provide access to your records, including Shopify reports and other documentation, as soon as possible. Your tax professional should spend their time on tax planning and preparation and planning, rather than cleanup bookkeeping.

2. Gather revenue and sales records

First, document all of your business’s revenue during the tax year. Do this before you review expenses or deductions.

• Export Shopify reports. If you are a Shopify merchant, use your admin reports to download detailed tax reports, sales data, and financial summaries. These reports break down sales by jurisdiction for state and local reporting.

• Reconcile totals against your 1099-K forms. Compare the gross sales totals in your Shopify or other reports with the amounts shown on any 1099-K forms you received from payment processors. Investigate differences caused by refunds, chargebacks, fees, or sales tax collected.

• Document other income. Review your business bank statements for interest earned and records of any capital gains from business investments. Include these amounts in your revenue documentation.

3. Compile and categorize business expenses

Next, compile your deductible expenses. To be deductible, expenses must qualify as “ordinary and necessary,” meaning they are common in your industry and relate to running your business. Start by gathering complete records and then sort expenses into clear categories your tax professional can easily review. 

• Download bank and credit card statements. Export statements for all business accounts for the full tax year. If personal and business expenses are mixed, flag business-related transactions.

• Assign expenses to core categories. As you review transactions, group them into common categories such as:

• Advertising and marketing (ads, email lists, and influencer fees)

• Rent payments (office, studio, or warehouse space)

• Home office (business-use portion of rent or mortgage, utilities, and internet)

• Shipping (postage, packaging materials, and labels)

• Professional fees (payments to investment professionals, tax preparers, or legal consultants)

• Software (ecommerce platform and business app subscriptions)

• Save supporting documentation. Keep invoices, receipts, and contracts for larger or recurring expenses in an easy-to-reference file or folder.

4. Reconcile your inventory

Ecommerce businesses that sell physical products use the value of unsold inventory at year end as part of federal—and often state—tax filings. Your ending inventory helps you calculate your cost of goods sold, a tax-deductible expense, so inaccurate counts can cause your expenses to be overstated or understated for tax purposes. Reconciling your inventory ensures these figures are correct. Conduct a physical inventory count on the last day of your tax year (typically December 31) to confirm exactly what stock you have on hand. 

• Count all unsold inventory. Physically count items in warehouses, storage locations, or retail space, including finished goods and sellable components.

• Assign accurate values. Use your purchase costs to calculate the total value of inventory on hand at year-end.

• Update your records. Adjust your inventory system or spreadsheets so the ending inventory matches your physical count.

If you skip this step, your tax adviser may have to rely on estimates, which can overstate reported income and lead to higher taxes or scrutiny from the IRS.

5. Review personal pass-through deductions

If your ecommerce business is structured as a pass-through entity (sole proprietorship, LLC, or S corp), your business profits pass through to your personal return. As a result, your personal deductions can directly affect how much tax you owe on business income. 

Gather the following personal tax documents that may apply to your situation:

• Homeownership records. Collect Form 1098 showing mortgage interest paid and records of property taxes for the year.

• Education-related tax documents. Locate student loan interest statements and documentation for qualifying education expenses.

• Charitable contribution records. Compile receipts or records for cash and inventory donations to qualified nonprofit organizations.

• Health and insurance tax documents. Gather records of health savings account (HSA) contributions and, if applicable, Form 1095-A (the health insurance marketplace statement).

In addition to income tax, sole proprietors, single-member LLC owners who do not elect to be taxed as an S corp, and partners in partnerships are also responsible for self-employment taxes, which cover Social Security and Medicare and can significantly affect total tax owed.

6. Maximize retirement contributions

One of the best ways to lower your tax liability is to contribute to retirement accounts that allow for tax-deferred or exempt contributions.

• Confirm eligible retirement accounts. Review whether you contribute to a traditional individual retirement account (IRA), a self-employed IRA (SEP-IRA), or solo 401(k), and verify the contribution limits that apply for the current tax year.

• Review contribution activity. Check your account statements to see how much you’ve already contributed and whether you have room to make additional contributions.

• Plan contributions before the deadline. You typically have until the April 15 filing deadline to make retirement contributions for the prior tax year. Gather your contribution records and, if needed, consult with investment advisory services or a financial adviser before filing to ensure you take full advantage of available deductions.

7. Verify estimated tax payments

The US tax system operates on a “pay as you go” basis. If you earn significant self-employment income, you’re generally expected to make quarterly estimated tax payments via Form 1040-ES. 

• Gather proof of estimated payments. Locate bank statements, payment confirmations, or account transcripts showing the dates and amounts of all advance payments you made during the year.

• Reconcile payments and identify gaps. Add up your quarterly payments, confirm they’re reported correctly on your return, and note any shortfalls so your tax professional can account for any penalties or interest and advise on next steps.

Many business owners use prior-year tax liability as a reference point when making estimated payments to reduce the risk of underpayment penalties. A tax professional can help determine whether your payments met current safe harbor rules (minimum payment thresholds that protect you from penalties).