Amazon Seller Taxes: How Should You Prepare for Payment?

As I’m sure you’ve noticed, everything has gotten quite a bit pricier lately. Just a few weeks ago I was told by a few different companies that their prices were increasing. Let’s not even mention the price of gas and groceries. Somehow, after all these expenses, we’re also expected to save for our tax payments. Is that something you are confident in doing?

Most people will probably say no. Luckily, help is available. Keep reading for some helpful tips and advice about Amazon seller taxes and how you can prepare for payment.

Profit First Makes Amazon Seller Taxes a Breeze

Profit First can work miracles to help you prep for Amazon seller taxes. The call you hate getting from your tax preparer becomes quick and painless when you can pay what you owe by simply writing a check instead of looking for change in the couch cushions. So how does Profit First do it? The answer is actually very simple.

Set Up Your Amazon Seller Tax Info

The first thing you'll want to do is start a bank account specifically with your Amazon seller tax info. This can be a checking or savings account that is designated only for federal and state income taxes. Property and sales taxes will be taken out of your regular operating expenses checking account. As Amazon settlements come in, pull out cash needed for taxes and move it into an account designated for taxes. Don’t touch the money until it’s time to make your estimated quarterly payments or at year-end.

The next thing to do is to ask yourself how much should be set aside for this account. It is my recommendation that you look at last year’s tax return and figure the percentage of tax to revenue. This offers a solid baseline number.

Throughout the year, check in on this number to be sure it still makes sense for you. Last year might have been exceptionally profitable, but this year the numbers look different. If you are quickly growing your profits, you might also need to recalibrate. Check in with your CPA to see if this is the case. September is normally an excellent time to stop and do this.

After You Write the Check

If you’re using a tax account to set aside money for your taxes, you may find that it’s hard to dial that amount in to be the exact amount that you owe. I know I have had that issue myself. I consult my CPA and my financial planner each quarter with my projections, yet invariably something changes in the way we operate, and the number is off.

Many people solve this issue by overpaying and waiting for a refund once they file their taxes. I’m not a fan of this approach. I’d like to pay what I am expected to owe and keep any additional that I’ve allocated in my tax bank account. That way, I have access to the money immediately once I know what I owe, assuming I don’t owe more than I’ve set aside in my account.

But what do you do with the extra money in the tax account if you have excess? First, think about the next date for estimated taxes. For money earned in the first quarter, your estimated taxes are due in April (followed by June, October, and January for the other three quarters). Look at your balance to ensure you have funds set aside for that payment.

Make a Plan

If you still have extra money available, then you need a plan. It’s tempting to take the money out and do something frivolous with it. But let’s think about other possibilities.

One option is to start a vault account. By using Profit First, you know your profit account balance will grow over time. One of the reasons you have a profit account is to build up an emergency fund to cover three to six months of expenses. As your profit account begins to grow, consider moving the emergency fund money into your vault account. The extra funds from your tax account can provide some extra cash to start this account.

Look for a low-risk interest bearing account for this money. Remember, this is money you won’t touch unless there is an emergency. As you create the account, also consider the rules for when you will tap into the money. Is it when your sales drop below a certain level, or your inventory is lost at Amazon? The point is to think about the situation in advance and write it down. It’s much easier to make these types of decisions when you’re funding the account rather than when you’re in panic mode.

Another possibility is that you want to grow your business in some way and the extra cash would give you the boost to do so. This might be adding a new product line, a new team member, or a new piece of equipment. Take the time to clearly think about what would give your business the best return and if the cash is really enough to see the project through. Adding a new team member means you’ll have to pay that person regularly. A little cash for one month’s pay isn’t enough to ensure payroll for the many months to come. Be strategic about how you can use this money - it will wait patiently while you make this decision.

Finally, consider if you need to adjust the amount you are allocating into your tax account with each profit allocation. If you expect conditions from last year to be similar for the coming year, you may need to reduce the amount. I suggest watching it closely and engaging your tax professional each quarter to determine if you’re on the right track.

Be careful here, too. It’s easy to reduce the tax allocation and just let the extra be absorbed by operating expenses. You’ve done without the money this long, so why let it get bloated? Instead, increase your allocation for profit or owner’s pay. If you’re planning on hiring, perhaps set up a payroll account and let that fund start to grow with that amount. If you have three months of salary saved up, and you’re able to contribute a month’s wages to the account each month, you're in a position to make that move. Or, creating a bank account for product development and dedicating the money for this activity will allow you to see when you have the funds available to make that step.

Avoid the Trap

You can easily be trapped by using all of your cash on ads or inventory. You might even be taking owner draws that you don’t realize are heavily impacting your account. It’s understandable that growth is the main thing on a business owner’s mind, making that money sitting in the account look very tempting. This is a trap. Even though you only have to “get square” with the IRS once each year, taxes are still what it costs you to do business. Be prepared to cover the cost by setting aside the money. By putting the money back into your business, you are essentially propping yourself up on borrowed cash and the loan will be called on before you're ready.

The End Result

The true benefit of Profit First is allowing you to see how your money is working for you. Making sure you cover your obligations to the government is a great first step, and you can do this by creating a tax bank account. But as you employ this strategy each year, realize that how you manage that tax account is important, and it can have strategic implications for growing your business.

Profit First can help you feel less stressed and panicked about your business all the time, not just during tax season. If you need some guidance on getting started, or just have questions to ask about Amazon seller taxes, reach out to our bookskeep team. We’re here and happy to help!