What to know about paying taxes on a U.S. ecommerce business

Navigating ecommerce business taxes in the U.S. can be daunting. There are several types of taxes, and they vary based on factors like your business structure and where you’ve chosen to incorporate. Learning the basics of business taxes is an important part of ensuring you can focus on what you do best — running your business.

This article covers everything you need to know to get started.

Every business is required to pay taxes. Your tax rate depends on the legal structure of your business, while how much you pay depends on factors like the structure of your business, how much you earn in personal income, and where you’ve chosen to incorporate. 

We’ve outlined common business structures and their taxation below.

• Sole proprietorship: A sole proprietorship is the simplest and most common type of business legal structure. As an owner, you will assume all financial and legal obligations of your business, and report your business’ income on personal tax returns.
• Partnership: A partnership is formed when two or more people come together to run a business. Depending on the specifics of the business, partners can either assume all or some financial and legal obligations of their business and, in certain structures, offer limited liability protection to their partners. Like sole proprietorships, partners report their share of business income on personal tax returns.
• C-corporation: C-corporations, known commonly as corporations, are separate legal entities from their owners, and consist of shareholders, a board of governors, officers, directors, and employees. Corporations pay income tax on their profits. Corporations are taxed twice — first when the business makes a profit, and again when shareholders are paid dividends on their personal tax returns. This is known as double taxation. 
• Limited Liability Company (LLC): Your LLC’s tax rate depends on whether you’ve chosen to operate as a sole proprietorship, a partnership, an S-corporation, or a C-corporation. LLC members must pay self-employment taxes, and in some states, must pay additional annual taxes to operate. However, if these structures are carefully set up, members can ensure that their profits and losses are passed through to their personal taxes. 
• S-corporation: S-corporations are popular among business owners because they offer the same advantages as traditional corporations but with more tax flexibility. In an S-corporation, profits and certain losses can avoid corporate taxes and instead pass through to owners’ personal income tax.
• Limited Liability Company (LLC): Your LLC’s tax rate depends on whether you’ve chosen to operate as a sole proprietorship, a partnership, an S-corporation, or a C-corporation. LLC members must pay self-employment taxes, and in some states, must pay additional annual taxes to operate. However, if these structures are carefully set up, members can ensure that their profits and losses are passed through to their personal taxes. 

LLC tax filing: A deeper breakdown

LLCs have more filing flexibility than any other structure — but that flexibility means you need to know exactly which category you fall into before you file. Here's the full breakdown:

Single-Member LLC (default: disregarded entity) The IRS treats a single-member LLC as a sole proprietorship by default. You file your business income and expenses on Schedule C, which attaches to your personal Form 1040. You'll also file Schedule SE to calculate self-employment tax. No separate business return is required unless you elect a different tax classification.

Key forms: Form 1040, Schedule C, Schedule SE

Deadline: April 15

Multi-Member LLC (default: partnership) A multi-member LLC is treated as a partnership by default. The LLC itself files Form 1065 (Return of Partnership Income) as an informational return, and each member receives a Schedule K-1 detailing their share of income, deductions, and credits to report on their personal return.

Key forms: Form 1065, Schedule K-1 (per member), Form 1040 (per member)

Deadline: March 15

LLC Electing S-Corporation Status To elect S-corp taxation, you must file IRS Form 2553 within 2 months and 15 days of the start of your tax year (for a calendar-year business starting January 1, the deadline is March 15). Once elected, the LLC files Form 1120-S annually. Profits and losses pass through to members via Schedule K-1. One important requirement: S-corp owners who work in the business must pay themselves a "reasonable salary," which is subject to payroll taxes. Distributions beyond that salary may avoid self-employment tax.

Key forms: Form 2553 (election), Form 1120-S (annual return), Schedule K-1 (per member)

Deadline: March 15

LLC Electing C-Corporation Status To be taxed as a C-corp, file IRS Form 8832 (Entity Classification Election). The LLC then files Form 1120 annually and pays corporate income tax at the flat 21% federal rate. Shareholders also pay personal income tax on dividends — the double-taxation scenario. This election is less common for small businesses, but can be strategic for companies retaining earnings or seeking outside investment.

Key forms: Form 8832 (election), Form 1120 (annual return)

Deadline: April 15

Quick Reference: LLC Forms at a Glance

Before filing, make sure your books are fully reconciled. Mercury's accounting automations can sync your transactions directly with your accounting software, making it much faster to pull the records you need at tax time.

We’ve outlined six types of taxes you’ll likely have to pay as an online business owner. This list is not exhaustive — depending on your business, there are many more business taxes that may also apply.

Income tax

Income tax covers federal and state taxes, as applicable. While LLCs, partnerships, S-corporations, and sole proprietorships do not pay income tax as businesses, their owners still pay tax on the income they take home from their businesses at their individual tax rate.

For example, if you have $50,000 in taxable business income as a single filer for the 2025 tax year, your federal income tax is calculated across multiple brackets—you don't pay a single flat rate on the whole amount. Here's how it breaks down:

• 10% on the first $11,925 = $1,192.50
• 12% on income from $11,926 to $48,475 ($36,549) = $4,385.88
• 22% on income from $48,476 to $50,000 ($1,524) = $335.28

Total estimated federal income tax: approximately $5,914

Note that this example uses $50,000 as taxable income—meaning after any applicable deductions. The standard deduction for a single filer in 2025 is $15,000, so if your gross business income were $50,000 and you claimed the standard deduction, your taxable income would be $35,000, and your actual tax bill would be lower. Always consult a tax professional for your specific situation.

Tax brackets adjust annually for inflation. For the most current rates, visit the IRS directly at irs.gov/filing/federal-income-tax-rates-and-brackets.

Self-employment tax

Self-employment tax covers Social Security and Medicare and applies to businesses profiting more than $400 annually.

• To calculate your liability amount, multiply your business income (after expenses) by the amount subject to self-employment tax, 92.35% (0.9235), then multiply this number by the self-employment tax rate, 15.3% (0.153).

Payroll tax

If you are an employer, you’ll have to pay payroll tax. Payroll tax covers federal income tax withholding, social security and Medicare taxes, and federal and state unemployment taxes. These taxes are paid at a rate of 7.5% of your employees’ wages.

Capital gains tax

You will pay capital gains taxes on any profit you might make off selling your business assets. Rates vary depending on whether assets are categorized as short or long-term.

Sales tax

Sales taxes on businesses are determined by factors like the state you’ve chosen to incorporate in and where you warehouse your goods. In most states, if you sell taxable products or services to customers, you’re required to pay sales taxes.

Understanding sales tax nexus

Sales tax nexus refers to the link between your business and a state that requires you to collect and remit sales tax. You may establish nexus if you have a physical presence (like an office or warehouse), store inventory in a fulfillment center, or exceed a state’s sales threshold — often $100,000 in sales or 200 transactions annually.

If you trigger nexus in a state, you’ll need to:

• Register for a sales tax permit
• Collect the correct rate (which varies by state and locality)
• File and remit sales tax on the state’s required schedule

Ecommerce tax nuances: What's different when you sell online

Selling online introduces tax complexities that traditional brick-and-mortar businesses don't face. Here are the most important ones for ecommerce founders to understand.

Marketplace facilitator laws Most major online marketplaces—including Amazon, Etsy, eBay, and Walmart Marketplace—are now classified as "marketplace facilitators" under state law. This means the platform is legally responsible for collecting and remitting sales tax on your behalf for sales made through their platform in most states.

What this means in practice:

• If you sell exclusively on Amazon or Etsy, the platform typically handles sales tax collection and remittance for you—you generally don't need to file separate sales tax returns for those marketplace sales
• However, you may still need to track those sales for nexus purposes. In some states, marketplace sales count toward the economic nexus threshold even if the platform collected the tax
• If you sell through your own website (e.g., Shopify, WooCommerce) in addition to a marketplace, you are responsible for collecting and remitting tax on those direct sales in states where you have nexus

Note: Marketplace facilitator laws vary by state and change frequently. Always verify the current rules for each state where you sell.

Dropshipping and sales tax nexus: Dropshipping adds another layer of complexity. When you use a third-party supplier to fulfill orders directly to your customers, nexus can be created in unexpected ways:

• If your supplier has a warehouse in a state where you have no presence, their physical location doesn't create nexus for your business—but it's worth confirming with a tax advisor
• If you have a fulfillment arrangement with a company like Amazon FBA, Amazon may store your inventory in fulfillment centers across multiple states—each of which can create physical nexus for your business, even without your knowledge
• As the seller, you're responsible for collecting and remitting sales tax on direct sales to customers in states where you have nexus, regardless of where the goods ship from

Multi-state filing complexity As your ecommerce business grows, you may trigger nexus in multiple states simultaneously—each with its own registration requirements, tax rates, filing frequencies, and due dates. Key things to manage:

• Economic nexus thresholds: Most states use $100,000 in sales or 200 transactions as the trigger, but some states differ (e.g., Texas uses $500,000)
• Filing frequency: Some states require monthly filings once you exceed certain revenue thresholds; others allow quarterly or annual filing
• Origin vs. destination-based taxation: Most states are destination-based (tax is based on where the buyer is located), but a few states—including Texas, Pennsylvania, and California—have specific rules. Always apply the buyer's local tax rate
• Local tax rates: In states like Colorado and Louisiana, local jurisdictions set their own rates, and the combined state + local rate can vary significantly even within the same state

Tools like TaxJar, Avalara, and Shopify Tax can automate multi-state sales tax calculation, collection, and filing—a worthwhile investment once you're selling in more than two or three states.

Keeping your ecommerce revenue organized by state is much easier when your payment data flows directly into your books. Mercury's ecommerce banking integrates with your store so your financials are always current—especially useful when tracking nexus thresholds across states

Dividend tax

Dividend tax covers the investments made by a business. Since dividends are considered income, they are either taxed according to the owner’s tax bracket or the corporate tax rate, depending on the company’s structure.

Sales tax in the U.S. is administered at both the state and local levels, and rates can vary significantly depending on the buyer’s location. While some states like Oregon, Delaware, Montana, New Hampshire, and Alaska do not impose a state sales tax, others — like California and New York — have both state and local sales tax components.

When selling in multiple states:

• Make sure to apply the correct combined tax rate (state + county + city) at checkout
• Monitor rate changes as local jurisdictions can update them periodically

Some states also impose other business-related taxes or fees, including:

• Franchise tax: A fee for the privilege of doing business in certain states (e.g., Texas, Delaware)
• Annual report fees or business license renewals: Common in states like California and Florida

Understanding these local obligations is essential for ecommerce companies and remote sellers operating in multiple jurisdictions.

As a business owner, you are required to make payments throughout the year to various local, state, and federal tax authorities. Stay on top of your records, know what details you need for different forms, and be cognizant of deadlines. These steps will help make paying these taxes easier — plus, your bank account will thank you in the long term.

We’ve outlined the steps you need to follow below.

1. Collect your records

Before filling out any tax forms, you’ll need to collect and organize records summarizing your tax year transactions (January 1–December 31). Complete records will reflect your business earnings, the expenses you can deduct, and the tax credits you may be eligible to claim. All of this information can save you money.

You’ll also need:

• Last year’s tax returns (if applicable)
• Your Employer Identification Number (EIN)
• Your Social Security Number (SSN)
• Financial statements (balance sheet and income statement)
• Receipts (required to account for business expenses)

2. Find the right form(s)

While Form 1040 is the standard tax return for most personal income tax purposes, business owners have a host of new income tax returns to remember. Additionally, don't forget about using Form 1040-ES to make your quarterly estimated tax payments.

Most business owners are required to pay estimated income and self-employment taxes throughout the year. Before you start gathering forms, make sure your books are fully reconciled for the tax year—disorganized records are the most common cause of filing errors and missed deductions. Mercury's accounting automations sync your transactions directly with your accounting software, so your records are always ready when you need them. You can also use Mercury invoicing to ensure all revenue is properly captured and categorized before you file.

The forms used by the most common structures include:

• Sole proprietors: Owners file their personal income tax return (Form 1040) using the Schedule C (Profit or Loss from Business) and Schedule SE (Self-employment tax) attachments.
• C-corporations: Owners file a personal income tax return and use Form 1120 for business taxes.
• S-corporations: Owners file a personal income tax return and use Form 1120S for business taxes.
• LLCs: Owners can file in a few ways:
  • Single-owner LCCs: Owners file their personal income tax return (Form 1040) using the Schedule C and Schedule SE attachments
  • Co-owned LLCs: Owners do not pay separate business incomes taxes unless they choose to file as corporations, but must file a personal income tax return and Form 1065 (Return of Partnership Income) for information purposes.
  • LLCs that elect to be C-corporations: Owners file their personal income tax return and a Form 1120 for the business.
  • LLCs that elect to be S-corporations: Owners file a Form 1120S.

3. Fill out the tax form(s)

Most businesses report earnings on the Schedule C form, which subtracts expenses from business earnings to arrive at a number that determines your net profit or loss. Once you have this number, you can transfer it to your personal income tax form and include it with all other personal income tax items. Forms can be found on the IRS website or through a tax software.

4. Be hyper-aware of tax deadlines

The types of taxes you pay are just as important as when you pay them. However, the number of unique tax obligations for business owners can make it easy to miss a tax filing or due payment. A comprehensive calendar of the tax year’s deadlines can help avoid penalties.

These deadlines are a key difference between individual and business taxes. While most individuals pay taxes once a year on a date set by the IRS, most business owners pay estimated income and self-employment taxes throughout the year. For example, business owners must make quarterly estimated tax payments on January 15, April 15, June 15, and September 15. If you have employees, you might also be responsible for monthly payroll tax filings.

If you're not ready to file by your deadline, you can request an extension—but it's important to understand what an extension does and doesn't cover.

What an extension does: An extension gives you additional time to file your return. It does not give you additional time to pay any taxes owed. If you expect to owe taxes, you must estimate and pay that amount by the original deadline to avoid penalties and interest.

Form 7004 — Business Tax Extension Most business entities file for an extension using IRS Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns). Filing Form 7004 grants an automatic 6-month extension.

Entities that use Form 7004:

• Partnerships (Form 1065) — extends deadline from March 15 to September 15
• S-Corporations (Form 1120-S) — extends deadline from March 15 to September 15
• C-Corporations (Form 1120) — extends deadline from April 15 to October 15
• Multi-member LLCs (Form 1065) — extends deadline from March 15 to September 15
• LLCs taxed as corporations — follows the same extension rules as the elected corporate form

Form 7004 can be filed electronically through the IRS e-file system or through most tax software platforms.

Form 4868 — Personal Tax Extension If you're a sole proprietor or single-member LLC filing on Schedule C (your business income flows through to your personal return), you'll request an extension using Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return). This extends your personal return deadline from April 15 to October 15.

Penalties for Late Filing and Late Payment

Interest also accrues on any unpaid balance from the original due date, regardless of whether an extension was filed.

The bottom line: File Form 7004 or Form 4868 before your deadline, even if you can't pay what you owe. Filing on time eliminates the late-filing penalty (the larger of the two penalties), and the IRS has payment plan options if you need more time to pay.

Owners of pass-through entities pay personal tax rates on their self-employment income, which range from 10–39.6%. This sum does not include self-employment, payroll, property, dividend, and capital gains taxes. If you are the owner of a corporation, you may also incur special corporate tax rates on income, which vary just like personal tax rates.

Generally, the more money your business generates, the higher the tax rate will be. If you own a corporation, corporate taxes paid to the federal government will not necessarily be your total corporate income tax liability. A number of U.S. tax credits exist to help small businesses reduce the amount of taxes they owe or to receive the largest refund possible.

You should regularly set aside 30–40% of your income in a separate business account for budgeting to cover federal and state taxes. This amount may be more than you end up using, but it’s best to overestimate until you’ve established a routine for paying taxes. This routine will let you accommodate changes, like the annual adjustments the IRS publishes for the business tax rate.

Reducing your tax burden is important for any business, and can have a huge impact on your bottom line. Here are several deductions and credits that may apply to your ecommerce business, followed by a quick breakdown of how your business structure can impact your tax treatment:

Home office deduction

If you work from a home office, you may be eligible to deduct a portion of your rent or mortgage, utilities, and maintenance. To qualify, the space must be used exclusively and regularly for business purposes — even a dedicated corner of a room can count, but it cannot double as a personal space.

Tax deductions and credits

• Startup cost deduction: You may be able to deduct up to $5,000 of startup expenses — such as business formation fees, legal costs, or initial marketing — in your first year of operation.
• Qualified Business Income (QBI) deduction: Eligible pass-through entities like sole proprietorships, partnerships, and S corps may deduct up to 20% of their qualified business income, subject to income thresholds and certain limitations.

Tax credits for startups and small businesses

• R&D tax credit: Available for companies developing new products, technologies, or software. Even early-stage startups may qualify.
• Small Business Health Care tax credit: If you provide health insurance to employees, you may qualify for a credit worth up to 50% of premiums paid.
• Ecommerce incentives: Some states offer specific credits for businesses investing in digital infrastructure, logistics improvements, or hiring remote workers.

Be sure to consult a tax professional to determine which deductions and credits apply to your unique business situation. They can also guide you on possible tax benefits based on your business structure.

Tax benefits by business structure

• Sole proprietorships & single-member LLCs: Report profits and losses on your personal tax return. Eligible for home office deductions and business expense write-offs.
• Partnerships: Income passes through to partners, who report on their personal returns. Can deduct shared business expenses.
• S Corporations: Profits pass through to owners, but you may also be required to pay yourself a "reasonable salary" subject to payroll taxes. Distributions may avoid self-employment tax.
• C Corporations: Subject to double taxation (corporate profits and shareholder dividends), but eligible for broader tax deductions and lower corporate tax rates.
• Multi-Member LLCs: Typically treated as partnerships, but can elect to be taxed as an S-corp or C-corp for strategic tax planning.

Why tax compliance matters

If you plan to attract investors or sell your company, having your tax filings in order — with no outstanding liabilities — is crucial. Clean financials demonstrate professionalism and reduce due diligence risks in the event of a sale or fundraise.