For most sellers, figuring out what you will owe in taxes is most of the battle. Sometimes it is the case that you have correctly assessed what you owe, but ran into cashflow or liquidity problems and cannot “pay the bill.” For the most part, if you stay on top of knowing what you will owe, it is relatively easy to set the right amounts aside in an account devoted just for taxes. Putting money into this account on a monthly or quarterly basis is the best way to ensure that things will run smoothly when it is tax time.
Amazon Seller Taxes: It’s All About the Profits
The amount of difficulty that you will have during tax season depends on how well you run your business. Because the amount of tax you will owe is a proportion of your profits, the key thing will be to know exactly what you will be declaring as your yearly profit, and then deducting accordingly. If your business is managed well, this will be a trivial matter. If it is not, you will be in for some trouble.
The general best practice for Amazon sellers is to determine a fixed set point. This is a fixed dollar amount that you will keep in your operations account to cover monthly operating expenses. When the revenue starts coming in and the balance in the operations account exceeds the set point, take out the excess and put it into another account. Being able to consistently subtract a fixed set point of expenditures against revenue streams is the backbone for correctly declaring profits at year end, which will form the basis for your taxes outstanding. Another benefit of having a strict set point is that it will force you to consistently keep costs under control. Sellers who do not do this will face reduced profits via excessive expenditures and tend to declare too much in profit, which destroys future growth.
To Declare, Or Not Declare
As an entrepreneur, one of the big questions will be: should I declare this excess as profit and pay tax on it, or should I use this money to grow my business in some way? Suppose you have $3,000 in excess that you’ve been taking out of your operations account every quarter. Maybe you still have your day job and do not need to pay yourself a salary. Instead of declaring a $12,000 profit and paying tax on it, you could spend the $12,000 on expanding your warehouse capacity, or on a new social media ad campaign, for example. Declaring zero profit for the first few years that you are operational is often the best thing to do – zero profit means zero taxes, which means more freedom for capital expenditures. At what point should you start declaring profit on your books is a matter of debate in the business community. For Elon Musk and Jeff Bezos, the answer is to delay this as long as possible. Not all of us are expecting to bring in a trillion dollars in revenue after the first seven years, but the idea is worth contemplating, nonetheless. Read our related blog post The 9 Core Parts You Need to Increase Profitability in Your Business.