Does Shopify send me a 1099-K?
Yes, if you use Shopify Payments and exceed the federal threshold ($20,000 AND 200+ transactions for 2026 under OBBBA Section 70432) or your state threshold. New Jersey requires 1099-K reporting at just $1,000 with no transaction minimum. The form is issued by Shopify Payments under its own EIN, not Stripe. Find it in your admin under Finance > Payouts > Documents.
Why is my 1099-K higher than my actual revenue?
The 1099-K reports gross payment volume with zero adjustments. It includes product sales, shipping collected, sales tax collected, refunds (not subtracted), chargebacks (not subtracted), and gift card sales. You reconcile on Schedule C by deducting refunds (Line 2), sales tax remitted (Line 23), processing fees, and shipping costs as expenses.
Does Shopify collect and remit sales tax for me?
No. Shopify is NOT a marketplace facilitator. Unlike Amazon, eBay, and Etsy, Shopify does not collect or remit sales tax on your behalf by law. Shopify Tax is a calculation tool that can compute the correct rate at checkout and optionally file returns ($75/return), but YOU must register for permits in each state, configure collection, and ensure remittance. The one exception: orders placed through the Shop App (Shopify's consumer-facing shopping app) are handled by SC Commerce Services Inc. as a marketplace facilitator.
How do I know which states I have sales tax nexus in?
You have nexus in any state where you have physical presence (inventory, office, employees) or where your sales exceed the state's economic nexus threshold. The most common threshold is $100,000 in sales OR 200 transactions. Shopify Tax provides a Liability Insights dashboard showing your state-by-state sales volumes and alerting you as you approach thresholds. Check it regularly under Settings > Taxes and duties.
Is the NJ sales tax rate 6.625% on everything I sell?
NJ's statewide rate is 6.625% on most tangible goods. Key exemptions: most clothing and footwear, unprepared food, prescription drugs, and some medical devices. Digital products (audio-visual works, audio, e-books) are taxable under N.J.S.A. 54:32B-2(zz). SaaS is generally exempt under TB-72. Shipping charges are taxable when the underlying sale is taxable under N.J.A.C. 18:24-27.2. Urban Enterprise Zone businesses may charge 3.3125%, but pure e-commerce sellers generally do not qualify.
What Shopify fees can I deduct on my taxes?
All ordinary and necessary Shopify costs are deductible under IRC Section 162(a): subscription fees ($39-$2,300+/month), payment processing fees (2.5%-2.9% + $0.30), third-party app subscriptions, premium themes, domain registration, POS hardware (Section 179 eligible), Shopify Email costs, and Shopify Capital borrowing fees (interest only, not principal). Report on Schedule C.
How do I report COGS for my Shopify store?
On Schedule C Part III: enter beginning inventory (Line 35), add purchases and inbound freight (Line 36), subtract ending inventory (Line 41). COGS = Line 40 minus Line 41. COGS includes wholesale cost, inbound shipping, customs duties, and packaging integral to the product. It does NOT include marketing, Shopify fees, outbound shipping to customers, or your own labor. Most small sellers qualify for the IRC Section 471(c) small business exception ($32 million gross receipts threshold for 2026), allowing simplified inventory accounting.
What if I use PayPal AND Shopify Payments?
You receive separate 1099-Ks from each payment processor. Shopify Payments issues one and PayPal issues another. Thresholds apply per platform, not combined. Create a master reconciliation worksheet: start with each 1099-K Box 1a, subtract refunds, sales tax collected, and processing fees to arrive at each processor's contribution to adjusted gross income. The total should match your Shopify Finance Summary report.
Do I need to charge sales tax on shipping in NJ?
Yes, if the underlying product is taxable. Under N.J.A.C. 18:24-27.2, delivery charges on taxable goods are taxable at 6.625%. If a shipment includes both taxable and exempt items, you must allocate the shipping charge proportionally. Failure to allocate makes the entire shipping charge taxable. Configure this in Shopify's tax settings for New Jersey.
When should I form an LLC for my Shopify store?
I recommend forming an NJ LLC ($125 filing fee) once you have inventory, regular sales, or any real liability exposure. The LLC provides asset protection (separating personal assets from business debts) and credibility. An LLC is a legal structure, not a tax election. By default, a single-member LLC is taxed identically to a sole proprietorship on Schedule C. The tax treatment only changes if you elect S-Corp status.
When does S-Corp election make sense for a Shopify seller?
The S-Corp election starts making sense at consistent net profit of $100,000 to $120,000+. At $80K net, the SE tax savings (~$4,400) are largely offset by compliance costs ($3,000+) and reduced QBI deduction. At $150K, net annual savings reach $6,000 to $10,000+. Run the numbers using my S-Corp Calculator before deciding. File Form 2553 by March 15 for current-year election.
What is the Voluntary Disclosure Agreement (VDA) for sales tax?
A VDA lets sellers who have not been collecting sales tax in states where they have nexus come forward voluntarily. Benefits: penalty waivers, limited lookback period (typically 3-4 years versus unlimited during audit), and sometimes reduced interest. Apply through the Multistate Tax Commission (MTC) National Nexus Program before the state contacts you. Once contacted, VDA eligibility is generally lost.
How does Shopify Capital affect my taxes?
Shopify Capital offers merchant cash advances (MCAs) and business loans. For MCAs: the advance is NOT income, but the total fee (amount repaid minus amount advanced) is deductible. For loans: principal is NOT deductible, but the borrowing fee (analogous to interest) IS deductible under IRC Section 163(a). Split each payment into principal and fee portions in your accounting.
Can I deduct inventory that did not sell?
Unsold inventory at year-end is NOT a deductible expense. It remains as ending inventory on Schedule C Part III (Line 41) and is not deducted until those items actually sell. However, you can write down damaged, obsolete, or worthless inventory to its lower fair market value. Document the condition and reason for the write-down.
Do I need to file quarterly estimated taxes?
Yes, if you expect to owe $1,000+ in federal tax or $400+ in NJ tax after withholdings. Quarterly due dates: April 15, June 16, September 15, January 15. The NJ underpayment penalty rate is 10.00% for 2026, far higher than the federal 7% rate. Use my Estimated Tax Calculator to determine your quarterly amounts. Federal safe harbor: pay 100% of prior-year tax (110% if AGI exceeds $150,000).
What records should I keep for an IRS audit?
Keep all Shopify Finance Summary reports, payout reports, 1099-K forms, purchase invoices, inbound shipping receipts, bank statements, credit card statements, sales tax filings, and state registration certificates. Retain records for at least 3 years from the filing date (6 years if you underreported income by more than 25%). Export Shopify data regularly since historical data only goes back to October 2023.