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Best Practices in Accounting & Taxes for eCommerce Sellers with Angela Sticca Snyder of Taxanista
In this interview, we are discussing what are the best practices in accounting and taxes for eCommerce sellers. Now for this often misunderstood and complex topic, we are excited to introduce you to my personal and business accountant, Angela Sticca Snyder from Taxanista.
Angela, finding an accountant that understands eCommerce is not an easy task, at least from my experience. Is it really that important for sellers to find a CPA with eCommerce experience?
Some would say no because numbers are numbers, but I would say yes because I've seen so many people's books in taxes where their accountant really didn't ask enough questions. eCommerce is definitely handled a little bit differently. So it is important to make sure that whoever is assisting you does understand eCommerce.
I know many sellers use a local CPA to do their taxes. I certainly did for many years until I found you. It never even occurred to me that I could work with the company outside of my local area but you're based in Arizona and I'm on the East Coast. So how does that work? Sellers don't have to work with an accountant in their own backyard?
Absolutely, that's correct. You do not need to at all. We're licensed in all 50 states, so it doesn't matter whether you're down the street from us here at Arizona or whether you're in Maine. We can still assist you. And with technology nowadays, we deal with so many clients via Skype or via email or phone or even Dropbox that it really just doesn't matter where you're located in order for us to be able to help you. So, location is of no issue.
But how do you stay abreast of different state requirements and changes between jurisdictions?
It's impossible to stay up on every single change that happens in every state and in the federal government. When we have a particular state, we will look at the rules and the laws for that state. Most states follow very similar rules but with our software that we utilize, we’ve got a matrix of all the states so we can see how states handle things differently.
What are the kinds of questions sellers should ask when they are talking to a potential CPA about their business?
Number one is if they are licensed. Then also if they do have any experience with Amazon or with eCommerce. I would also find out if they typically report things on a cash or accrual basis. With most small businesses, everybody is on a cash basis. However, with Amazon, sometimes we'll find that businesses are going the accrual route.
Is that a bad thing?
No, it's not a bad thing at all. Alot of people want to keep the inventory on the balance sheet and want to keep track of their inventory – and that would be the accrual basis. However, there are some businesses that are really small and they are not going to be very, very large and so they keep their books on a cash basis. And so, by keeping it on a cash basis, they write everything off, whenever they incur it, and then they don't keep track of any physical inventory.
How would you advise most of your eCommerce clients?
The majority of them do cash basis, and then occasionally some will do accrual. There's not a right or wrong. It's just once you make up your mind you have to stick with it. You can't flip-flop. And if you do want to change, then you do have to request and get approval from the IRS.
Is bookkeeping something that should be outsourced? Or is this something that sellers should try to handle themselves?
Well, I would definitely say you want to outsource it. However, there are some caveats with that. For instance, if you’re just starting off and funds are tight, then I would say, No, you need to definitely stick with your own bookkeeping.
You need to understand your numbers and you need to understand if you're making money. And the only way you can really do that is to actually look at your numbers yourself.
So, in the beginning, I would say definitely take care of it yourself. After your business starts getting going and maybe you've got gross sales of around $100,000, that's when you should start considering looking to have somebody assist you.
What software do you recommend for inventory tracking and bookkeeping? I personally use and love Inventory lab and Excel spreadsheets.
I'm just going to give you my opinion on what I hear from people. I hear a lot of people like Inventory Lab. I do like Inventory Lab myself as well from an accountant point of view, and being able to go in and grab the data that we need. Excel spreadsheets can do quite a bit. My only concern with Excel spreadsheets is that, unfortunately, it's garbage in, garbage out. There's no checks and balances. There's no way to confirm and be sure that you have not missed anything.
I do like utilizing Xero. And Xero is what we utilize for accounting and for bookkeeping. It does have an inventory module in it, so it depends on how many SKUs you have. So if you do lots of retail arbitrage, and you have lots of SKUs it's probably not the best, because you'd have to keep track of it in Xero as well.
If, however, you focus on a couple or a handful of products or you white label it – you bring stuff in underneath your own label – and you got maybe a dozen or a couple dozen SKUs, then Xero would work great.
For many sellers, organizing our receipts alone can seem like a full-time job. So what tips do you have for how to best manage and organize receipts?
As far as the way to organize them, I would definitely invest in the scanner. Unfortunately, I wish I had this great secret but you do have to scan them. There are ways to get it done easier, but you still need to scan or to copy it.
The ultimate in laziness would be to utilize Shoeboxed. That's a service where you mail the receipts off to them. Another level of taking it out of your hands would be when you are ready for bookkeeping. Some bookkeeping packages include that as well.
The biggest category you're going to have is going to probably be “Goods”, “Cost of Goods Sold” or “Purchases”. So get one folder for that. I would keep it in the easiest place you possibly can so that the instant that you enter you can put it there. But in order to save some time, I would probably come up with just a couple of categories.
Maybe you've got “Products” but then you also have “Supplies” and “Shipping Supplies”. That would create so much help that, at the end, you're only going to have a nice small manageable amount of receipts left.
What are some of the biggest mistakes you see eCommerce sellers make when it comes to managing their accounting process?
Some of the biggest mistakes I see sellers make are not saving the receipts and not keeping track of their mileage.
Mileage is a big one, especially if you're driving around everywhere. I would definitely recommend MileIQ or something like that in order to keep track of your mileage. If you are interested we do have a discount code, reach out to me directly and we can send it to you. I think it's either 20% or 30% off a year subscription to MileIQ. Just reach out to me and we can get you that.
Where should sellers start when they have not handled their business financials in the best way or if their books are just a hot mess?
Typically what I would suggest is just come up with a few categories. Grab sticky notes and lay those sticky notes out in front of you. Grab a pile of your receipts and then just start shuffling them like cards into those different categories. Get the process started to get them sorted. That would be my recommendation.
And for those that may not be technology savvy or who don't want to do so much, then do an Excel spreadsheet or even a Google spreadsheets. What you can do is just have the major categories of expenses and then list off all your transactions. At least that way you've got something.
How important is it to choose a business structure right away when you're just getting started? And which entity structure is the right one to choose?
Most people start off as a sole proprietor. Then after they get going for a little while they say “OK, well this is actually a little more than a hobby, maybe I should set up an LLC”. And then typically they will get started with an LLC.
You do not have to become an LLC in order to be a legitimate business. There are not any deductions that are available to you that wouldn't be available to you as a Sole Proprietor.
So it's not like there are special deductions that LLC’s get that Sole Proprietors don't get. That's definitely a misconception people have. As far as beyond that, if you are in business with somebody else, like a friend or someone that's not your spouse, then you are automatically considered a Partnership which requires a Partnership tax return. So that's definitely something to consider.
If you're in business by yourself, or you've got contractors or employees, when your business starts to really take off, then I suggest you look at S-corp status with the IRS. When you do go that route, unfortunately, it's really important that you have become an LLC as early as possible.
The only time when I would say that it's probably a good idea to become an LLC as quickly as possible is if you are intending on growing this business quickly, and as high as possible, and you know your net profitability is going to be at least $50 -80K very soon.
Speaking of profits, many sellers plow most of their profits right back into their business when they first get started. At what point should they pay themselves a salary as the sales increase?
You see I'm a business owner too, so I get it. Most of us do not pay ourselves a salary for quite a while. Although I am the first one to tell you you need to need to pay yourself and you need to pull those funds out. But I'm also the first one to understand what being self-employed is. And sometimes it's difficult.
Even if you're paying yourself $600 a pay check, then that's something. And I remember that's what I felt like I could afford the very first time I cut myself a paycheck. So find out what you feel comfortable doing and then get yourself doing it on an automatic all-the-time basis. Then, if you're able to do it then I would slowly start increasing it.
There are several factors to consider, but yes, it is a very good idea to start off paying yourself no matter how small from the very beginning.
Can you elaborate a little about Sales Nexus – what is it and what should sellers be doing about it?
That's a really, really hard topic. There's not been any specific conclusion on it yet, unfortunately. Nexus is when you have some type of presence within that state – whether you have another business in that state, you have a rental, you live in, you go to trade shows, you deliver products…those kinds of things. That's not all inclusive. If you have some type of physical presence in that state, then you have nexus in that state and, as such, you need to collect and report sales tax.
There are good companies out there that where their specialty is helping with sales tax. What they do is specialize in and thoroughly get how the sales tax works and how to pull it out of Amazon and the different warehouses. So, if you are looking to get fully compliant in the sales tax arena with Amazon, then I would suggest getting with a few of them – Avalara and TaxJar. If you'd like our personal opinion on either one of those, feel free to give us a call.
What triggers the dreaded IRS audit? What can sellers do to prevent themselves from triggering an audit, and if it happens, what's the first thing that they should do?
A mathematical error is the number one thing that can trigger an audit. Other kinds of things would be maybe home office. It's only a red flag if you do it wrong or if you claim an excessive amount.
Typically speaking, a home-office amount of about 10% or less would be logical. If, for instance, you are trying to claim your kitchen desk, and you're at 18% or 20%, that's too much. However, if you house inventory and you are including that, then that's perfectly logical. So I would say that it's going to be the illogical things that could cause the audit flags.
Which is why it's very important, in my opinion, to have a professional to help you with this process, and not try to figure it out yourself. It's hard enough as it is because you definitely don't want the IRS coming after you.
Yeah, that's very true. It's not pleasant because no matter what, it's going to cost you one way or another. Even if you try and represent yourself, you are still going to want to consult an accountant just to make sure that you're not hurting yourself. So, one way or another, it's going to cost you something. We want to try and minimize that, if at all possible.
So, at the time of this recording, we are in the fourth quarter. What can sellers do to finish the year off strong and begin a new year on the right foot as it pertains to managing their finances and preparing for the tax season?
If you do any driving whatsoever for your business, I would download the MileIQ app. If you reach out to us then we will give you a discount code.
If you're not saving receipts, start saving them now. Even if your system is envelopes or folders or something like that, come up with something.
If you had a really good year, maybe you might want to consider putting money into retirement, because that will greatly reduce your taxes. Also look at your state. Is there any chance you have any state tax credits that you can take advantage of before the end of the year? I know several states that do.
If you are profitable this year and you want to reduce your tax – Do you need a new computer? Do you need a new dolly to move inventory? Maybe make some of those purchases now. Same with inventory. Maybe make an inventory purchase before the end of the year.
But I think the end of the year is really just evaluating where you are at. Do you need to spend more money to reduce your taxes? Do you want to put some money away into a retirement account? Let's get ready for next year. Let's get ready for keeping track of your expenses.
It's also a good time to evaluate whether your business is going to increase quite a bit next year. If it is, then you might want to make sure that you've got an LLC in place, and/or that we look into creating an S-corp.
If anybody wants to try out Xero, just reach out to us and we would be more than happy to give you a free account for a couple of months to try out.
Angela, your company is Taxanista. Can you just tell us a little bit about the type of services you offer to eCommerce sellers?
We do everything from monthly bookkeeping to just taxes at the end of the year, to handling IRS audits or notices if you ever happened to get those. We can also help you get your accounting books set up. We can help you make sure that you're doing it correctly.
We can give you training on Xero. We can also just do quarterly reviews and help you with your estimated taxes. We can help you with your payroll, should you have payroll clients. Or sales tax, if you want to just keep track of sales tax within the state of where you are living.
Anything that has to do with accounting, bookkeeping, taxes, numbers, IRS… anything and everything to do with that.
Thanks everyone for reading our Expert interview with Angela Sticca Snyder from Taxanista. If you have any comments or questions, leave them below and we’ll make sure Angela has a chance to see them!
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