Kevin Brown, CPA, is a Senior Audit Manager and manages the Accounting Services Department at Larson & Company. Kevin works with small businesses of all kinds to help them meet their accounting needs.

 

You have decided to start a business and begin selling products online. That’s great news; a chance to fulfill the American Dream. Now what are you supposed to do about all the accounting? We offer the following advice on things to consider and be aware of as you are getting things going. We hope this will help save some time on your end and give your business the best chance of success.

Business startup

We won’t go into the details of all the ins and outs of starting a business. However, we will focus on some e-commerce specific items related to starting a business.

When creating an e-commerce business you need to know if you will have employees or not. Many states will ask if you plan to have payroll as part of the business registration process. You will need to ensure your e-commerce business has filed for a payroll tax ID so the appropriate payroll taxes will be paid.

As an e-commerce company you will likely be paying sales tax on items you sell. We’ll go into more detail below on sales tax, but you will need to obtain a sales tax ID for any states where you qualify as having nexus.

Accounting Software

You will need to maintain financial records for your e-commerce business, commonly referred to as the accounting. Financial recordkeeping is vital to ensure you record how much money you’re making as well as ensuring that you file your taxes accurately and timely. There are many options available for e-commerce business to maintain their accounting records. Microsoft Excel, QuickBooks, Xero, and Freshbooks are common accounting solutions utilized by e-commerce businesses.

Here are a few things to consider as you determine what accounting software will work best for your e-commerce business:

  • Cost – The key here is fulfilling the needs of financial record keeping while not breaking the bank. Not all e-commerce businesses need the most advanced ERP/accounting software to maintain an accurate accounting of financial activity.
  • Ease of use – You’ll want to find a software that is easy to learn or that you are already familiar with. Extensive time learning a new accounting software while also building an e-commerce business is a recipe for burnout and failure.
  • Integration – Technology allows a lot of repetitive tasks to be automated. There are accounting software solutions that allow you to sync activity with Amazon, e-bay, Shopify, and many more. By getting things automated you will save yourself a lot of time as well as having financials that update automatically.
  • Functionality – You will want to make sure the software allows you to track the information you need. Some e-commerce businesses track inventory, while others need to track international operations. There are many similarities between various software solutions, but ensuring that your accounting solution tracks all the information that is important to you is vital for the success of your business.

Sales Platform

As a new business you will need to decide what sales platform you will use. There are many options available that have helped make the decision process much easier. Notable e-commerce platforms include Amazon, e-bay, Shopify, etc. Most people don’t consider how adding different sales platforms/ channels will impact the accounting until after the fact. By considering the operations and accounting solutions necessary to record transactions across different platforms you can avoid the headache of creating records after the fact. This will keep your financials up to date and provide all the information necessary when analyzing sales.

Integrations

Integration capability goes hand in hand with accounting software and sales platform. Depending on the integrations available you may not be able to directly sync transaction records between your accounting software and sales platform. There are other options to automate these processes so you don’t need to manually enter information. One example of this is A2X. With A2X you are able to sync your Amazon and Shopify sales with QuickBooks.

Payroll

There are no differences in payroll processes with e-commerce.

Sales tax

Sales tax is something that can become very complex for an e-commerce business. Being familiar with the laws of states where you are doing business will help ensure you stay in compliance. If you have nexus in a state, you will need to collect and remit sales tax to that state. E-commerce businesses may have multiple states with nexus. There are several things that can trigger nexus, such as having a physical location or employees in a state. Nexus rulings have been further complicated by legal rulings. As a result, states have created varying thresholds which will require you to collect sales tax. One example of these types of thresholds is once you have $100,000 or 100 sales in a state you will be required to collect sales tax.

As you grow your e-commerce business and transactions across multiple states increase you will need to make sure you follow sales tax remittance laws. Noncompliance can trigger audits and fees.

To assist growing businesses with sales tax compliance, service providers such as Tax Jar and Avalara will handle your sales tax filings for you.

Inventory

Inventory can be difficult to track for a small business. Fortunately, there are options available to help you track this information. Some available options for inventory management are QuickBooks, Zoho and Shopify. Make sure to familiarize yourself with the limitations as well as integrations of each software when inventory is involved in order to find the best solution for each sales platform utilized by your business.

When to involve an accountant

This decision comes down in large part to how much of your time do you want to spend doing the accounting vs. how much time is needed to work on growing your business. As you are starting you may find you don’t have the resources available to pay for an accountant. As you grow and free time to handle the accounting yourself decreases you’ll want to involve someone that has the expertise to ensure your accounting is accurate and provide you with the best solutions for your business.

 

For more information about accounting for ecommerce contact Larson & Company today.