3 Tax Basics Every Online Entrepreneur Needs to Know

As an online entrepreneur, you're constantly juggling multiple tasks - creating content, serving clients, and growing your business. But there's one crucial aspect that often gets overlooked until it's too late: taxes. In a recent interview with tax expert Joshua Thompson, we dove deep into the world of taxes for online entrepreneurs. Here are three essential tax basics that every digital business owner should understand.

1. Understanding Nexus: The Hidden Tax Trap

If you think you only need to worry about taxes in your home state, think again. Enter the concept of "Nexus."

Nexus is a tax term that essentially means having a significant presence in a state, which can trigger tax obligations. For online entrepreneurs, this is particularly tricky because you might be creating Nexus in states you've never even visited!

Joshua explains, "Nexus is extremely important, especially since the South Dakota court case in 2018-2019. It basically determines when you have to pay taxes in a state."

Here's what you need to know:

✅You can create Nexus by selling products or services to customers in other states.

✅Each state has different thresholds for what constitutes Nexus.

✅If you have Nexus in a state, you may be subject to both income and sales tax in that state.

Action Step:

Review your sales by state and consult with a tax professional to determine if you have Nexus in any states outside your home base.

2. The 1099-K Conundrum: Don't Double Your Troubles

If you're using payment processors like PayPal, Stripe, or Square (and let's face it, who isn't?), you need to be aware of the 1099-K form and recent changes to reporting thresholds.

Joshua warns, "They're changing it to $5,000 or more flat - boom, you're getting a 1099-K."

Here's the potential issue:

➡️ You might receive both a 1099-K from your payment processor and a 1099-NEC from your client for the same income.

➡️ This could make it appear to the IRS that you've earned twice as much as you actually have.

To avoid this headache, Joshua recommends:

- Keep meticulous records of all income and the sources.

- Work with a skilled bookkeeper who understands these nuances.

- Be prepared to clarify any discrepancies to the IRS if necessary.