Accounting. That scary word that some Amazon sellers fear and wish wasn’t a thing.
Dread it. Run from it. Accounting will always be required.
Business at the end of the day, sadly, is a numbers game. And accounting is all about being on top of your numbers.
If you’re going to start and run an eCommerce business but choose to ignore accounting, at best you won’t really know where your business stands financially, and at worst you’ll get audited by the IRS and then you’re in heaps of trouble.
So, in this post, we’re going to go over accounting for new and budding eCommerce businesses and what you need to know so you don’t get in trouble but also don’t invest too much money at the wrong time.
Tip #1: Get an LLC and business account
Even if you’re unsure if Amazon will be a long term thing for you, it’s wise to get an LLC and have a separate business account where all of your business transactions take place.
If Amazon doesn’t work out for you, you can still use an LLC for any business you start in the future. A list of costs to start an LLC by state will help you see how much it is to get one.
Beyond an LLC, having a business bank account is a great thing to have as early as possible in your business adventures. A business bank account allows you to draw a very clear line between business purchases and personal expenses, making accounting much cleaner and easier to execute on.
If you get a professional to help you with your taxes, they will be very happy to hear that have a separate business account, even if you’re just starting out.
Beyond this, you can get an EIN for your business to help with various business functions.
Tip #2: Keep all receipts, log all Transactions
Keep a log of every expense that goes towards your business. You can keep receipts, invoices, anything and everything. If money changed hands, then you should have a record of it.
It’s classic advice, but it’s good advice. Keeping receipts and transaction history early will help any professional you talk to when you decide you need a bit more help.
If you keep good enough records and understand the basics of keeping your financial information organized, you can even file your taxes yourself, although using a professional is always advised.
Tip #3: Know Transaction Threshold for Reporting to IRS
At the end of the year, Amazon will send a 1099 to you for your tax records, and they’ll also send one to the IRS to inform them how many sales you made on the platform.
Something a lot of people don’t know about Amazon, however, is that Amazon will only send the 1099 to the IRS informing them of your sales if you have hit $20,000 in sales or 200 transactions.
If you sold 190 products for a total revenue of $4,700, then Amazon will not inform the IRS and they will not know you are even selling on Amazon unless you go out of your way to inform them.
Your decision to inform the IRS is your responsibility, but it’s good to know when they are informed of your business efforts.
Tip #4: Get an Accountant when it makes sense
An issue with accountants is that they can be expensive. When you’re just starting out your business, you might do well enough to keep good financial records and file your taxes yourself or with minimal help.
As sales go up, and the complexity of your business increases, you will know the right time to start seeking help from a professional accountant.
Typically when you start to get into 6-figures in yearly sales is when you should start thinking about getting a dedicated accountant to help you with filing your tax returns.
Tip #5: Understand Bookkeeping & Get a Bookkeeper
Bookkeeping is a crucial part of any business, and as your business grows you should definitely hire a bookkeeper to manage your books on a monthly basis.
While you’re just starting out you can likely keep a very good log of your spending and business transactions to help, and if you’re even adept enough you can do some light bookkeeping when your business is very small.
Keep in mind that you should get a bookkeeper as early as possible for your business, and if you start to use an accountant they’ll have to backdate bookkeeping to get you caught up.
So all in all, bookkeeping is something you can’t avoid and will be a guaranteed business expense as your business grows.
Tip #6: Know how States Sales Tax Affects Amazon Businesses
One great thing about running an Amazon business these days is that sellers in most states are not subject to paying out each individual state for sales taxes incurred when someone buys your product from a specific state.
In the past you would have to go through the complicated process of paying out specific states for sales tax charged because the process was not automatic.
Today, the state sales tax payout is pretty much automated for everyone, unless you live in these 4 states: Delaware, Montana, New Hampshire, and Oregon. If you live in those 4 states, then you will likely need help from a professional.
With these tips you won't get caught off guard in the early days of selling on Amazon. Once you get comfortable with getting your books done, have a good accountant, then afterwards accounting will become an afterthought you no longer fear.