Running an Amazon, Shopify, or Etsy store is exciting. You’re building something of your own, making sales while you sleep, and scaling up without the overhead of a brick-and-mortar shop. But then tax season hits, and suddenly, it’s not so fun anymore.
“Wait… Do I owe sales tax in every state? What the heck is self-employment tax? And why does it feel like I’m working for the IRS instead of myself?”
We get it. Taxes are confusing, frustrating, and (let’s be honest) kind of the worst. But avoiding them or assuming you’ll “figure it out later” is a surefire way to end up with a massive tax bill or penalties down the road.
At Insogna CPA, a top Austin, Texas CPA firm, we help e-commerce entrepreneurs legally minimize their tax burden, stay compliant, and keep more of what they earn.
Let’s break down what you actually owe and how to make sure you’re not overpaying.
The 3 Taxes Every E-commerce Seller Needs to Know About
Most online sellers think taxes = income tax, but that’s only part of the picture. Here’s the full breakdown:
- Sales Tax – Collected from customers, remitted to the state.
- Income Tax – Paid on your profits.
- Self-Employment Tax – Covers Social Security & Medicare.
Each tax applies differently, depending on where you sell, what you sell, and how your business is structured.
Let’s unpack them one by one.
1. Sales Tax: When and Where Do You Have to Collect It?
Sales tax is not your money. You’re just collecting it for the state and handing it over like a responsible business owner.
Do You Need to Collect Sales Tax?
✔ ️YES, if you have nexus in a state (more on that below).
✔ YES, if your revenue exceeds a state’s economic threshold (usually $100K+ in annual sales).
✔ YES, if your products are taxable in that state (not all are).
Common Mistake: “I Registered My LLC in Wyoming, So I Only Pay Sales Tax There”
Reality Check: Your LLC’s location means nothing for sales tax. If your Amazon FBA inventory is sitting in Texas or California, you have nexus in those states and must collect and remit sales tax there.
What You Can Do:
- Use TaxJar or Avalara to automate sales tax tracking.
- Work with an Austin tax accountant (like us!) to register in the right states and avoid penalties.
Good News: If you sell through Amazon, Shopify, or Etsy, these platforms collect and remit sales tax for you in some states but not all.
Income Tax: What You Actually Owe on Your Profits
Income tax is what you pay to the IRS and your state on your net business profits.
How Much Will You Pay?
- Federal Income Tax: Ranges from 10% to 37%, depending on your total income.
- State Income Tax:
- If you’re in Texas or Florida, you’re in luck—no state income tax.
- If you’re in California or New York, expect up to 13% on top of federal taxes.
- Business Structure Matters:
- LLCs pay income tax on personal returns.
- C-Corps pay corporate tax first, then shareholders pay taxes on dividends.
Common Myth: “I Only Pay Taxes When I Withdraw the Money”
Reality Check: Nope. The IRS taxes your profits, not your withdrawals. Even if you leave every dollar in your business account, you still owe income tax on your earnings.
What You Can Do:
- Maximize deductions (see below).
- Consider an S-Corp election if you’re making $50K+ in profit—it can save you thousands.
- Work with a small business CPA in Austin, Texas to create a proactive tax plan.
Self-Employment Tax: The One That Sneaks Up on New Sellers
If you’re self-employed, you don’t have an employer covering Social Security and Medicare taxes for you. You’re on the hook for both sides.
How Much Is Self-Employment Tax?
15.3% of your net earnings (ouch).
- 4% for Social Security
- 9% for Medicare
Who Pays It?
- Sole Proprietors & Single-Member LLCs – Pay self-employment tax on all profits.
- Multi-Member LLCs & Partnerships – Each partner pays self-employment tax on their share of profits.
- S-Corps – Only pay self-employment tax on your salary, not your entire profit (this is why so many business owners switch to S-Corp status).
Common Myth: “I Can Avoid Self-Employment Tax by Paying Myself in Dividends”
Reality Check: The IRS requires reasonable compensation if you take an S-Corp election. If you’re running an e-commerce business full-time, paying yourself a $10K salary with $90K in dividends is a huge audit risk.
What You Can Do:
- Consider an S-Corp election to reduce self-employment tax legally.
- Use payroll software like Gusto to handle taxes automatically.
- Talk to a CPA in Austin, Texas to make sure your salary-to-dividend ratio is audit-proof.
Don’t Let Taxes Stress You Out: Plan Ahead & Pay Less
Most e-commerce sellers overpay in taxes simply because they don’t know how to plan ahead. Now you do.
✔ Sales Tax – Based on nexus & sales volume, collected from customers.
✔ Income Tax – Paid on business profits, even if you don’t withdraw the money.
✔ Self-Employment Tax – Covers Social Security & Medicare (but can be reduced with an S-Corp).
At Insogna CPA, a top Austin accounting firm, we help e-commerce sellers:
✔ Reduce tax liability with smart deductions & strategies.
✔ Stay compliant with sales tax laws to avoid penalties.
✔ Optimize business structures (LLC vs. S-Corp) for maximum savings.
Want to stop overpaying? Let’s build a proactive tax plan together—schedule a call with Insogna CPA today!