Taxes
Tax topics you need to understand to make sure you stay on Uncle Sam’s good side.
Sales Tax
Even if you don’t sell physical products, it’s still good to have an understanding of sales tax in case you ever decide to sell goods in the future. Also, some states charge sales tax on certain services.
The number one thing to remember about sales tax is that every state has different rules. This is what makes understanding it a pain in the neck and also causes misinformation when people share how sales tax works for them in a Facebook group or forum.
The first thing I recommend doing is figuring out whether or not your state has sales tax. The following five states don’t have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, & Oregon.
Next, you need to know whether or not your state has a destination-based, origin-based, or hybrid sales tax.
A destination sales tax means that you will charge sales tax based on the final destination or shipping address of your product. For example, if you live in Alabama and sell a product to someone in Alabama, you will charge sales tax based on the address where the product is being shipped. Your sales tax rate will change often, depending on what the local tax rates are for each address. If you sell a product to someone outside of Alabama, no sales tax is charged unless you meet their economic nexus threshold. More on that shortly.
An origin-based sales tax means that your in-state customers are taxed based on the location of the business. For example, if you live in Arizona and sell a product to someone living in Arizona, you will figure the sales tax based on your business address. The rate will never change unless your business address changes. If you sell a product to someone outside of Arizona, no sales tax is charged. Origin-based: Arizona, Ohio, Utah, Illinois, Pennsylvania, Virginia, Mississippi, Tennessee, Missouri & Texas.
California is the only hybrid sales tax state which charges state, county, and city tax based on the origin of the sale and a district tax based on the destination (shipping address).
Once you’ve determined which type of sales tax your state has, you’ll need to submit an application to get your sales tax ID number. The applications are fairly straightforward, but sometimes the question “how much do you plan to sell this year?” trips people up. Just know that your answer to that question is only being used to determine how frequently you will be required to file and pay your sales tax. It’s absolutely fine to estimate since no one knows what the future holds.
At the same time you receive your sales tax ID number, you will also be told how often to file the sales tax returns. Make sure to add these due dates to your calendar, along with a reminder so you never miss one. The due dates will either be monthly, quarterly or annually. It depends on your state and how much you plan to sell.
You will need a sales tax ID number for any state in which you have “nexus”. This is just a fancy word for having a significant presence within a state. That will definitely include the state you are living and working out of on a daily basis, but it could also include states you travel to for craft shows, markets, and essentially anywhere you physically go to sell your products. If you have a large number of transactions or sell a high volume in another state, you may have a nexus there as well. Again, each state has different rules, so you’ll need to look into those. In addition, remote sellers are now faced with the new “economic nexus” rule, which became law in June of 2018. This rule requires remote sellers (online and off-line) to collect and remit sales tax to a state once your sales volume exceeds a certain level (as defined by that particular state). Economic nexus is based entirely on sales revenue, transaction volume, or a combination of both, that you have within a state. This means that you may have a sales tax obligation in a state that you never actually step foot in! Our own nexus calculator is a helpful tool in determining where you may owe sales tax.
When you begin selling products (and in some states, services), you’ll want to make sure you are keeping good records. This can be done using a spreadsheet or within your bookkeeping program. When you set up your program, make sure the rates being charged follow the rules of your state.
Finally, when filing and paying your sales tax, you’ll need to have access to all of your records in order to determine the taxable income. The tax calculated on the sales tax form should match up within a few pennies to what you’ve collected for the period. If not, you’ll need to go back through your records to see what’s causing the difference.
Self Employment vs Income Tax
Self-employment tax and income tax are often mistaken for the same thing. It’s probably because they’re both paid with your annual tax return, but you should remember that they are two separate taxes.
Self-employment tax consists of two parts. The first part is Social Security tax (12.4% — set by statute under §1401, unchanged year-over-year), and the second part is Medicare tax (2.9% — also statutory, unchanged). You’ll see this calculated on the second page of your personal 1040 tax return. You’ll also see a deduction on the front page for 50% of the tax. While the deduction doesn’t reduce the tax dollar for dollar, it does reduce your overall taxable income, which affects income tax.
Income tax is charged based on what income tax bracket you fall into. The 7 federal brackets currently range from 10% to 37% (the rates were preserved past their original 12/31/2025 sunset by §70101 of the One Big Beautiful Bill Act, P.L. 119-21). The dollar boundaries between brackets get inflation-adjusted each year — see our brackets guide for the current-year amounts.
Both taxes are added together to determine the total tax due on your annual tax return. Remember that when you’re making estimated tax payments, these payments go towards the total tax due on your return, not just self-employment tax or income tax.
​
