Tax and Compliance Best Practices for [US] Web Designers (and Their Clients)

A web designer looking at a calculator and tax log
*This article was written by Avalara. This information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different. The information provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
**This information is based on United States taxes.

No industry has experienced massive change and growth over the last few years quite like retail. From strategies like in-store and curbside pick-up to a boom in ecommerce (both global and domestic), to a rise in multichannel and marketplace selling. 

With that came rocketship growth for the industries to support the ecommerce expansion–freelancers, agencies, and in-house teams helping existing ecommerce businesses grow and bringing brick-and-mortar businesses online. As ‌companies grow and expand, tax compliance responsibilities become that much more important for both retailers and service providers.

Beyond federal and state income taxes, professional web designers and developers are also tasked with understanding sales tax, use tax, tax rates, and potential tax exemptions, laying a foundation for why comprehensive tax compliance knowledge is crucial.

Sales tax rates and rules in the US are in constant flux. In 2023 alone, there were 11,192 sales and use tax rate updates in the US, 85,836 taxability updates in the US and Canada, and 98,910 sales tax holiday rule updates in the US.

We’ll unravel the complexities surrounding tax compliance, including the implications, navigating nexus laws, and employing best practices to manage these requirements effectively.

Managing tax compliance for agencies, website builders, and freelancers

Tax compliance is a confusing topic, especially for business owners. Most entrepreneurs aren't tax experts and would rather spend time growing their business, not tracking tax laws. But do freelancers, independent contractors, and service providers need to collect and remit sales taxes for the work they do? Like so many questions about sales and use tax law, the answer is: it depends.

In this case, it depends on the nature of your contracting business, the work you’re doing, and—above all—the state in which you’re doing the work. Let’s start with some basics to set a strong foundation.

  • IRS Reporting

    Businesses have been bracing for a new 1099-K reporting threshold for years, only to have each scheduled change pushed back at the final hour. A 1099 form is an IRS tax form documenting payments made to a business, individual, or entity that isn’t an employee. They’re top of mind at the start of every year because payers are generally required to send the appropriate 1099 form to the payee by January 31, though some 1099 forms are due after that. All 1099 forms must also be filed with the IRS. There are currently more than 20 different 1099 forms, and 1099-K reports non-W-2 income received during the year. Learn more about the recent news around 1099s and IRS reporting

  • Business licenses and permits

    Sales tax calculation might be the most well-known topic around tax compliance. Before you can start operating your business and calculating tax, you’ll need a business license. You may need several depending on your industry and location. Learn what’s required to get a business license

  • Sales tax registration

    Another responsibility before you can start collecting sales tax is registering your business. It’s illegal to collect sales tax without registering in the state where you’re doing business. Registering for sales and use tax can often be done online with the relevant state revenue department. Read some of the most common sales tax registration questions and Avalara’s answers to what you need to know to start collecting the right way.

  • Sales tax calculation

    Now you can start calculating tax. Calculating the right rate depends on a lot of factors, including what you’re selling, where you're selling, and who you’re selling to. Even if you don’t currently sell out of state or all of your sales are exempt, you need to be aware of sales tax compliance requirements for the state(s) where you do business. Sales tax should always be a consideration. There are many ways of establishing sales tax obligations, also called nexus. A good place to start is learning about the nexus laws for each state you sell to or have employees in

    But what about selling a service? As the US has shifted from a manufacturing-based economy to a service-based economy, many states have started to impose sales and use taxes on services as well. In general, six broad categories of services can be subject to sales tax. It also depends when it comes to selling digital products, too. 

    Determining how different states’ sales and use tax laws apply to digital products can be challenging. Though Americans increasingly stream games, movies, music, and other entertainment, read ebooks, and conduct business and personal activities online, some states still haven’t clearly defined how sales and use taxes apply to digital goods and services. Read more in Avalara’s state-by-state guide to the taxability of digital products.

  • Tax-exempt sales

    When a client or customer makes a tax-exempt purchase, you’ll need to collect a paper or digital copy of a valid exemption certificate. The certificate is your proof to tax authorities that you don’t owe taxes on that particular sale. An exemption certificate is a document that sellers collect in lieu of sales tax on exempt sales. Certificates typically apply in one of two scenarios; the purchase is for resale, so tax will be assessed on the end user or the buyer is a nontaxable entity, like a government agency, a religious organization, or a nonprofit.

  • Sales and use tax returns

    One of the most important parts of collecting and remitting sales tax is filing your sales tax return with the relevant state. If you’re registered for sales tax with a state, then you’re required to submit a return for the sales and use tax you’ve collected and remitted, even if that amount is $0.

  • Online marketplaces

    It’s possible to sell your products or services to anyone in the country, and even the world, thanks to online marketplaces. It’s also important to remember that the more places you sell to, the more places you may be obligated to collect and remit sales tax. Learn more about how sales tax works with online marketplaces and how it may affect you.

Avalara’s FAQ resource offers guidance for key stages of tax compliance and more in-depth information.

Managing sales tax for your clients

Thankfully, everything we’ve learned so far also applies to your clients and their tax compliance responsibilities. In addition, tools and technology can help your clients manage abundant taxability changes and growth. Together, we can also help your clients keep up with the ever-changing retail tax landscape with tax automation tools like Avalara AvaTax for Retail, Avalara Returns, Licensing & Returns, Avalara Consumer Use, and more. 

An online shopper expects a seamless checkout experience across multiple platforms, but not all stores are equipped to calculate tax in a buy online, pick-up in-store event and not all sales channels or marketplaces can collect exemption certificates or automatically calculate the correct taxes and duties. These failures can negatively affect a business's reputation and leave them open to costly fines for noncompliance.

Achieving compliance for your clients

There's a lot that goes into staying on top of compliance for a retail business: determining nexus, registering where you sell, calculating taxes, preparing and filing returns, and managing compliance documents. All of those steps get more complicated if you add multiple sales channels, like marketplaces and global ecommerce. 

For example, a retail business with less than 500 employees will typically spend an average of 209 hours per month on tax management activities and approximately $24,000 per month on tax compliance activities.

There is a solution

If the idea of entering new sales tax data into multiple systems every time your business gains an out-of-state client or a county announces a sales tax holiday fills you with dread, it might be time to automate.

You can keep up with the ever-changing retail tax landscape with tax automation tools like Avalara AvaTax, Avalara Returns, Avalara Business Licenses, Avalara Consumer Use, and more. For merchants running on Squarespace, Avalara connects to sales data and creates signature-ready sales tax returns for every state where you’re required to collect sales tax. Learn more here.

And to understand key components of the tax compliance landscape for 2024, check out Avalara’s Tax Changes report.

***Avalara Disclaimer: Tax rates, rules, and regulations change frequently. Although we hope you’ll find this information helpful, this article is for informational purposes only and does not provide legal or tax advice.
 

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Check out Squarespace Circle, Squarespace’s program for professional designers. Along with exclusive content, discounts, and other perks, Circle brings professionals together from across the globe to exchange advice while connecting with new clients and collaborators.


Avalara

Avalara makes tax compliance faster, easier, more accurate, and more reliable for 41,000+ business and government customers in over 75 countries. Tax compliance automation software solutions from Avalara leverage 1,200+ signed partner integrations across leading ecommerce, ERP, and other billing systems to power tax calculations, document management, tax return filing, and tax content access. Visit avalara.com to improve your compliance journey.

http://www.avalara.com
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