Taxes In Dropshipping Business: What Do Tax Experts Say?
Every type of business has an official part.
Dropshipping business is not an exception – as you remember, we have already discussed the strategies and benefits of registering your enterprise in the USA.
This article saw a huge interest, and numerous readers asked us about the taxation part. How could we resist?
To answer all your questions about taxes in dropshipping in a correct and professional way, we asked for the expert help.
Meet our tax expert – Sergei Suslov – Certified Public Accountant (CPA), Chartered Global Management Accountant (CGMA), and Ph.D. in Economics!
Sergei has more than 28 years’ experience in accounting, taxes, audit and finance. His SVS Accounting LLC agency focuses on business and individual income tax preparation. The agency’s major business area is assisting non-residents who run their enterprises in the United States. This accounting company is located in the state of New Jersey, nearby New York City, and it is servicing clients in all 50 states of America.
Please welcome Sergei in our blog!
Sergei Suslov – CPA, CGMA, Ph.D. in Economics
Dear fellow entrepreneurs,
Before answering your questions about taxes in dropshipping, I’d like to make two general remarks about the American tax system.
First, tax issues are taken very seriously in the United States. Everyone must pay! Even the famous Chicago gangster Al Capone was jailed back in 1931 not for racketeering and murders, but for the tax evasion.
All Americans know the phrase belonging to one of the country’s Founding Fathers – Benjamin Franklin (the guy on a $100 bill): “Nothing is certain but death and taxes”. So, do your best to follow the rules!
Second, both the American and the international tax systems are rather complicated. To make your life easier and avoid any troubles, it’s better to hire a good professional accounting firm with non-resident taxation experience to figure out your specific taxes in dropshipping.
Remember, you as a business owner have the final responsibility for taxes, so be careful! In this article, you will find a piece of advice on choosing the right accountant.
Now, let’s go to the readers’ questions!
What is the best US state to register a simple LLC for non-residents?
For a dropshipping business, you have to consider two of the most important tax parameters: state income tax and state sales tax. Some states, for example California and New York, have complicated tax reporting requirements and high tax rates. Some states do not require filing a state income tax return at all. Nevertheless, all states charge annual filing fees from the registered businesses. The same relates to a Sales tax, which we will discuss later.
From my experience, the most convenient and business-friendly states are Wyoming, Delaware and Nevada. They have no state income taxes for the businesses operating outside these states.
What are the tax filling requirements if you have a US company? Who handles the tax requirements of the LLC company if you live outside the US?
There are two main types of taxes in the Unites States: Income Tax and Sales Tax. In addition, there are several levels of taxation: Federal, State and, sometimes, City.
This tax is levied on net income.
It is calculated with the help of the following formula:
(Gross receipts from the business – all allowed business expenses) * Tax rate
It is calculated on the basis of federal tax rates for a federal income tax return, state tax rates for state tax returns, and city rates for cities. The three business-friendly states mentioned above do not have Income tax requirements on the state level.
Every business entity is subject to Income Tax reporting requirements, with a few exceptions. These reporting requirements exist even if you do not have an income or even if you have a loss. Of course, you only have federal income tax reporting requirements if you have registered your business in the non-income tax state.
Businesses must file income tax returns on time regardless of the net income amount. Punishment for LLC’s latefiling is simple – $195 per member for every month of delay up to 12 months. So, for two partners it could be up to $4,680 for one year delay. Corporation late filing penalties depend on the net income amount, and federal fines could be more moderate, but States usually hit hard following their state tax laws.
This is is an extra charge on the goods sold in retail sales. Sales Taxes are levied by States (not a federal government) from the businesses located within their jurisdictions. They are applied to the retail sales made to the same state residents. For example, if you registered your business in the state of Delaware and sold goods to New York residents without presence in New York, you owe zero Sales Tax to either state. So, if you sell a $100 item you charge your client for $100 and this amount is your Gross Revenue.
If you registered your business in the state of New York and sold goods in the same state, you have to pay Sales Tax to the state (and possibly to the city) of New York. In this case, if you sell a $100 item you charge your client for $100 + 8.75 NY Sales tax. A $100 is your Gross Revenue and $8.75 is a Sales Tax amount, which you must pay to the state of New York.
From a tax planning point of view, the conclusion is simple: do not register your dropshipping business in the state where you are going to have the majority of your online sales.
Your accountant will calculate the sales tax amount, make necessary sets up with the state and arrange automatic tax withdrawals from your bank account. All you need to do is keep enough money in the bank.
When you have established an American company, your personal place of living is not related to the reporting requirements. For most businesses, you hire an accounting firm which monitors these requirements and lets you know when it is time to report and pay taxes. Nowadays international communication is not a problem. You can easily arrange all your business affairs with your accounting company through the internet, telephone and mailing service. Again, the key issue is to find a good accountant, everything else will be easy.
Before doing your taxes in dropshipping, an accountant will need to do your books. We call this process bookkeeping, or write up. During the bookkeeping process, an accountant records all your financial transactions into the books and allocates them between accounts in accordance with rules and regulations. If you had a business in your country, you must be familiar with this procedure. Of course, the rules of bookkeeping are different from country to country.
What is Income Tax Return?
Tax Return is an American name for an income tax declaration – a document existing in most countries around the world. Your accountant prepares this document for you every year. It reflects all your business gross receipts, all allowed by tax law expenses, and calculates taxes on the net income (gross receipts less expenses). In most cases, it is mandatory to prepare and file the annual income tax returns to tax authorities.
Nevertheless, there are some situations when you can avoid filing. For example, if you registered a single member LLC and did not have any activity during the year, you can skip filing for this year. If you have a loss, the tax filing could be favorable for you, because the loss will be forwarded for 20 years ahead and your future taxable income will be decreased. The similar circumstances for a multi-member LLC could be more complicated. It is better to discuss this issue with your accountant. A Corporation must always file the tax return, no matter what.
When do we need to file income tax returns?
LLC’s and Corporations income tax returns are paid once a year, usually on or before March 15 of the next year. Nevertheless, the government wants you to pay ¼ (25%) of your future annual taxes every three months (quarterly). Because nobody is capable to predict the future, accountants use estimates. It is advisable, but not obligatory to make these quarterly advance payments (estimates). If you ignore them, Internal Revenue Service simply accrues interest on underpaid taxes at 2-3% annual rate, and you will pay it along with your regular taxes after yearend.
For example, your annual taxes in dropshipping were $10,000. You had to pay $2,500 in April, June, September and December, but you did not. IRS will accrue additional amount as follows:
$2,500 x 3%/12 x 8 + 2,500 x 3%/12 x 6 + 2,500 x 3%/12 x 3 = $106.25
How much should we pay for accounting services?
Every business will need a bookkeeping service and federal income tax return preparation. Depending on the state and city registration, you may have additional state and city income tax filing requirements. If your business is subject to the Sales Tax, you will need to file Sales Tax returns. To do all this reporting, you hire an American accounting firm. Every accounting firm sets up their own pricing system. They could charge you separately for every service or set up the flat fees for all reporting together. For example, our firm charges separately:
- Bookkeeping – starting from $25/month;
- Sales Tax returns – $100 per three months (a quarter) on average;
- Income Tax Returns – mostly $750 (once a year, including federal and one state).
These prices are not written in stone and could fluctuate. We believe to have the best prices on the market in terms of the quality/cost ratio.Of course, nobody wants to pay too much, but low prices could lead to the trap of an incompetent “specialist”. You can save hundreds on accounting fees, but lose thousands on extra taxes and penalties. Nothing could be more expensive than a cheap accountant.
If you are interested in more details regarding taxation of non-residents doing business in the United States of America, you can find them here.
We are really thankful to Sergei for this professional advice on taxes in dropshipping! Hopefully, the subject is much clearer to our readers now, and nothing stops them from starting their own businesses from home!
Thanks for the detailed explanation. However, even though this article is very clear in explaining the tax system, I don’t seem to get a real feel for how much will be owed in taxes. I understand that his depends on the state where you LLC is registered.
Let’s say you register your LLC in Wyoming and do 100 000$ /year when dropshipping. Your expenses are 40 000$. this means you are left with 60 000$ in profit (Let’s say you sell to europe so no sales tax). How much of the 60 000$ will you pay in taxes?
Thank you for the good question. We, actually, foreseen it, but blog articles have a size limitation. In a few days we will publish the full version of this article on our website with detailed comprehensive example of income tax calculation.
The details of tax calculation will take several pages. In a simplified form it will look like this. As a Wyoming LLC you will have no state income tax on your $60,000 income, but do not forget about multilevel feature of American tax system. You must pay federal taxes disregarding of the state of registration, and amount of these taxes will depend on the structure of your LLC.
If you have registered a single member LLC (you are the only owner), your federal tax on $60,000 net income will be around $9,800.
If you have registered a multimember LLC (let say you have a partner), than share of each member will be $30,000 and each member will pay about $3,500 to IRS or $7,000 form their combined $60,000 income.
You can easily calculate a $2,800 partnership advantage, but it doesn’t go for free. At the beginning, your LLC will have to make a $12,000 advance payment for each partner ($24,000 for both) with partnership income tax return. After filing the individual income tax returns, IRS will send the $8,500 refund checks to each partner. For the first filing, it could take several months between paying $24,000 advance and receiving two $8,500 checks back.
An International Tax Treaty between the Unites States of America and your country could diminish the amount of advance payment.
Thank you for the explanation Sergei.
I’m looking forward to the complete article.
The article doesn’t address taxes in other countries outside the US where the drop ship business is functioning.
That’s right! This article is about US taxes in case you are running a US company.
Hey guys if i am outside US like in Canada do i have to give taxes ?
Hi, if your company is registered in US you need to pay taxes.
so would you say you should register your business even if you are just starting out ?
Also if you should wait to register , what time would be good to register ?
Registration usually takes about 3 weeks. But you can start the business right away using your personal PayPal account for example.
Hi, guys. First I would like to thank you for this article, it is very helpful. And I would just like to see if I understood correctly…
If you register your company in Delaware on Wyoming, you work from your country (outside US), you ship FROM CHINA, and you do not sell a single item to anyone from Delaware or Wyoming (basically, you sell worldwide, except the state where you registered your business (Delaware or Wyoming)), the taxes are as follows:
Sales Tax: 0%
Income Tax: 0%
So you basically have 0% on your net income, right? Plus maybe some fixed federal tax rates or sth similar, which on annual basis for Delaware (I believe) is 600 USD, I do not know for other states…
So, the rest of net income is to be allocated to the owner(s). What are the tax fees for that, and do we pay taxes on that in US or in our country, if there is a double taxation agreement between USA and our country?
Thank you so much in advance for your answer.
if you run your LLC in these states you don’t need to pay federal and state taxes but anyway you need to pay tax on profits as any company in any country.
If you register your dropshipping LLC company (single member) in Delaware,you work from your country (outside US) You ship through some vendors in US to customers arroud US in different states.Do i have to pay sales taxes to these vendors?Do i have to charge my customers sales taxes?How much % will you pay in anykind taxes?
What about employees? I want to hire an employee in europe. How would that look like, if LLC registered in WY?
Side question: Would there be any other country that has lower taxation?
I am not sure about other countries but as for employee, you can just create an Independent contract agreement between your US based company and employee. You can also sign I-9 Form for non-US citizen to avoid any taxes.
Hi, my case seems different. I am a Nigerian who studies in Michigan. My brother uses my PayPal account to receive his Alidropshipping affiliate commission. Do I have to pay tax on his income? Since he earns it working from Nigeria, but I receive the money in my PayPal account.
I live in Eu, Do i need to have a company in US to sell to US? Or can I just use my company at my home country and just dropship to US. If so, would i then need to pay taxes to US? or to my home country?
Also I might use supplier from US and sell those products to US, does this have any effect on the question above? Thanks in advance, I hope this made any sense
am from India. what are the taxes to be paid, if am dropshipping my products from USA, shipping worldwide. Thanks in advance.
Hi, thank you for your question!
From the experience of one of our clients, Asif from India, we know that he pays ITR and GST. You can read his whole story and comments here: /dropshipping-india-success-story/
He also runs a thread on AliDropship forum: https://forum.aliexpress-na-russkom.ru/threads/a-little-bit-about-me-and-my-dropship-journey.2341/ – feel free to read it to learn more about other aspects of dropshipping in India!
First of all thanks to the author for taking the time to provide all these Information
I have few Questions Thanks In Advance
1. If I form a LLC IN Wyoming & ship products to usa & worldwide expect Registred state, however I know I will get the payments to stripe and my company is formed in USA, So I would need to file IRS right ? but should I also file ITR OR GST ( I dont ship to India)
Is there any IRS Slab, like in India lets say Up 5 Lakhs no need to pay taxes, so is there something like this ?
3. Another Question
Is the method of Payooner plus Stripe still working ?
Hi, what if I have registered my company in uk and sell items in whole usa? In this case what would be the sales tax?
What happens if I don´t pay a Annual Franchise Tax for an LLC registered in Delaware? I’m a foreigner outside the US.
Hi, thank you for your question!
You might want to consult your local legal advisor. Most likely, you will be subject to penalty fees.
is any one have an idea in Quebec tax for Dropshiping ?
1. Por lo que entiendo, actualmente no es necesario viajar a EEUU para abrir una Corporaciòn o empresa LLC. Se hace vìa internet.
2. He leìdo mas arriba que hablan de una dirección en EEUU, cómo la obtengo si no vivo allá, y no tengo familiares allá para usar su direcciòn ?
Muchas gracias por darme información por favor.
Hola, gracias por tu pregunta
Sí, de hecho puedes hacerlo, lee este artículo para obtener más detalles https://alidropship.es/registrarse-en-dropshipping-business-nosotros-obtener-raya-de-pagos-en-tarjetas-de-credito/. Puedes adquirir una dirección comercial en EE. UU. a través de servicios especiales por una tarifa, por lo que no es necesario tener amigos ni nada de eso en EE. UU. para que puedas registrar tu negocio allí. Pero ten cuidado al elegir el estado en el que vas a registrar tu negocio. Todo está cubierto en este artículo.