By doing away with the need to keep stock on hand, inventory management removes a major challenge from the dropshipping model. Because of this, it has become increasingly popular among college students, digital nomads, and just about anyone wishing to operate a global business with minimal investment.
Studies suggest that many new entrepreneurs make mistakes, especially when their business involves an international element, or when they operate through a U.S.-based LLC. While setting up a store is easy, taxes tend to trip people up.
In this post, we’ll discuss all the things concerning taxes for dropshipping business owner, whether he is based in the US or overseas, needs to know.
📌 Table of Contents
- From Defining Dropshipping to Understanding Tax Responsibilities
- Understanding the Types of Taxes in Dropshipping
- Step-by-Step Guide to Filing Your Dropshipping Taxes
- Exemption of Sales Tax as a Dropshipper
- Other Special Tax Considerations for Non-U.S. Residents with a U.S. LLC
- Tax Mistakes E-Commerce Sellers Make Too Often
- Tools and Resources to Help Reduce The Stress of Filing Taxes
1. What Is Dropshipping and Who Needs to File Taxes?
Dropshipping is a method that enables sellers to fulfill orders without having to maintain stock on hand. Rather than holding inventory, the seller obtains the items from a supplier or manufacturer who ships the products directly to the buyer.
You have to manage the website, do marketing, and handle customer service, but you won’t need to oversee storage, packing, or shipping.
✅ Who Needs to File Taxes?
If there is income brought in from a dropshipping business, taxes will need to be filed in some form regardless of:
- Your business status
- Your location
- Customer location
Here’s who needs to file:
- American citizens and residents who show any business activity.
- Foreign owners of a U.S. LLC corporation.
- Partnerships that Include U.S. or foreign members.
- Individuals exceeding the IRS filing minimum which differs from state to state.
👉 Bottom line: Payments are being processed from customers? There’s a high possibility something needs to be filed, even if its not owing taxes at that point.
2. Different Tax Types That Can Be Used Within Dropshipping
While there is no specific tax for dropshipping, several different taxes could be imposed on the business determined by its structure, location, and clients.
🧾 a) Federal Income Tax (US IRS)
With this taxes comes no additional charges to the government so long as the profits are being made and subsequently filed under. This tax is purely pay as you go. In addition, if sole proprietors want to claim back any funds can be done through Schedule C.
- Single-member LLCs are automatically classified as disregarded entities for tax purposes unless they opt for corporate taxation.
- Partnerships issue K-1 forms to partners and file Form 1065.
- C Corporations and S Corporations are also issued business returns and may incur taxes on the corporate level.
💸 b) State Income Tax (If Applicable)
Based on the formation location of your LLC or other nexus of economic presence, you may owe state income tax return filings.
Popular states for LLC registrations such as Texas, Wyoming, and Florida have no state income tax.
🏷️ c) Sales Tax
This is a transaction based tax and is not charged on your income. However, you are mandated to collect and remit this tax to the state where you established sales tax nexus.
The same goes for dropshipping and is often complicated by the fact that nexus can be triggered in different ways (more on this in Section 4).
🌐 d) Obligations of International Taxation
As a foreign non-resident holding an American LLC, your tax obligations may include:
- Filing U.S. tax forms even if tax liability is not present
- Satisfying tax obligations in your home country, exempting U.S. taxes
- Filing Form 5472 and 1120 each year to meet U.S. compliance requirements
3. Comprehensive Instruction on Filing Taxes for Your Dropshipping Business
✅ Step 1: Selecting Appropriate Business Structure
Choosing your business structure determines how you will report the income and taxes for your business.
- Sole Proprietor: Easiest but least legally protected.
- LLC: Offers legal protection and flexible tax treatment.
- Corporation: May offer tax savings at scale but involves more complexity.
An LLC remains the most preferred option among dropshippers and non-residents due to its simplicity and tax efficiency.
✅ Step 2: Apply for an EIN
An LLC must acquire an EIN to open a business bank account, hire contractors or employees, and manage tax filings.
You can apply online via the IRS website, or have a formation company like Bizstartz take care of it for you.
✅ Step 3: Record All Income and Expenses
Maintain accurate record for:
- Total gross sales
- Shipping and product costs
- Refunds and chargeback transactions
- Ad Spend on Social Media and Google
- Meta, Google, and Tik Tok advertising spend
- Hosting and app payment for the website
- Payments to contractors or virtual assistants
Cloud accounting solutions like the following can help you:
- QuickBooks Online
- Wave
- Xero
- Bench (specialized bookkeeping services, done-for-you bookkeeping)
✅ Step 4: Put Bound Taxes Aside
Expected bound tax for business is $1000 or more, IRS holds businesses to a rough estimate bound tax which needs to be paid quarterly. Due dates wearing as follows:
- April 15
- June 15
- September 15
- January 15 of the next year
Based on the tax bracket, and business structure estimate should be between 20-30% of net income.
✅ Step 5: Submit Tax Returns
Tax return that needs to be filled:
- Schedule C (Form 1040): sole proprietors and single-member LLCs
- Form 1120: owned foreign LLCs and corporations issue
- Form 5472: issued by meet foreign owned single member LLCs
- Form 1065: multi member LLC’s (partnerships) fill this.
State Returns (if applicable):
Depends on where your business is registered or has nexus.
✅ Step 6: File Sales Tax Returns (Monthly, Quarterly, or Annually)
The task includes:
- Permits for sales tax registered for active states
- Merchants selling on Shopify or Amazon must enforce tax collection at checkout.
- The administering policies are to be followed with tax filing and payment.
4. Sales tax as a dropshipper: Navigating
What is sales tax nexus?
It is defined as the relationship your business has with a particular state that permits sales tax to be remitted or collected with respect to that business activity.
Nexus can be triggered by:
- A business’s presence can be classified as offices, physical premises, warehouses or employees.
- FBA (Fulfilled by Amazon) model of doing business stores your products in Amazon warehouses which also triggers nexus.
- Meeting economic benchmarks that many states set ($100,000 in sales or more than 200 transactions).
Automate Nexus with Sales Tax Tools
- TaxJar: Great for multichannel sellers with auto-filing
- Avalara: Enterprise-level automation
- Quaderno: Useful for international sellers with US LLCs
All aforementioned tools integrate with Shopify, Amazon, WooCommerce, and many other platforms.
Dropshipping Tip
In situations where your supplier takes responsibility for tax collection and remittance for specific jurisdictions, you will be exempt. In most cases, however, as a retailer, tax liability falls upon you.
5. Special Tax Rules for Non-U.S. Residents with a U.S. LLC
Starting a dropshipping business in the US as a non-resident foreigner comes with some tax risks.
🧾 Important Tax Forms You Should File:
- Form 5472 + 1120: Applicable for foreign-owned single-member LLCs
- Form 1040-NR: For those with effectively connected U.S. income
- Form W-8BEN: For bypassing U.S. withholding on Stripe, Amazon, and similar platforms
- State returns: Only for those with physical or economic nexus
🔍 Will You Be Facing Any Tax Liabilities?
With your U.S. LLC, if you have:
- No employees to work for the business in the U.S.
- No operations located within the U.S.
- No sales made to customers in the U.S.
You may not owe taxes, but remain required to file taxes in order to avoid penalties.
6. Resources, Tools, and Tips for Filing with Ease
🧰 Recommended Tools:
- QuickBooks Online: For Accounting
- TaxJar: For Automated Sales Tax
- Gusto: For Payroll and Contractor Payments
- Notion / Airtable: For Tracking Financial Data Internally
📌 Tax Tips:
- Engage a CPA before tax season begins, not after
- Keep your receipts and invoices in a digital format (Google Drive or Dropbox)
- Early filing helps avoid penalties
- Start tracking your finances early, do not wait until you are “making money”
🤝 Bonus Tips For Foreign Entrepreneurs:
For U.S. tax compliance, bookkeeping, and accounting use Bizstartz for:
- LLC formation
- EIN applications
- ITIN applications
- BOI filing
Closing Thoughts
Filing taxes for your dropshipping business should not be a daunting task. With the right resources, an appropriate system in place, the right tools, and professional assistance, you can remain compliant and concentrate on growing your store.
No matter where you are selling from, be it Kathmandu, Cairo or California, staying organized, understanding obligations, and filing correct forms on time is the bare minimum.
👇 Need Help Starting or Managing Your Dropshipping Business?
At Bizstartz, we assist entrepreneurs from all over the globe:
- Form U.S. LLCs
- Acquire EINs and ITINs
- Set up U.S. bank accounts
- Tax-compliant bookkeeping and annual filings
Let us handle the backend, and you can focus on selling.
👉 Visit Bizstartz.com or book a consultation today.
📌 Frequently Asked Questions (FAQs)
1. Do I need to pay U.S. taxes if I am a non-resident running a U.S. dropshipping business?
Not always. As a non-resident with a U.S. LLC, you might not owe federal income tax if the business lacks U.S. effectively connected income (ECI). Despite that, IRS Form 5472 and Form 1120 must be filed annually. If the LLC has a U.S. office, employees, or warehouses (like with Amazon FBA), U.S. taxes would likely apply.
2. When is it necessary for me to collect sales tax?
You must collect sales tax if you have sales tax nexus in a state. This can occur when:
- You keep inventory in a state (e.g., through Amazon FBA).
- You have significant sales in the state (usually $100,000+ or 200+ transactions).
- You have employees, offices, or contractors in a state.
Use TaxJar or Avalara to monitor and manage nexus obligations.
3. What are the consequences if I do not submit Form 5472 for my foreign owned LLC?
The consequences of not submitting Form 5472 (with Form 1120) means that the IRS can impose a $25,000 penalty per year. These forms need to be filled out even when there is no profit made, or the person lives outside the United States, meaning there is no business activity in the country.
4. Is it possible to complete my taxes without a professional, or do i need an accountant?
For simple businesses and those who understand the U.S. tax rules, it is possible to file taxes without the help of a professional. However, a CPA or automated services should be considered for the following cases:
- As a non-resident,
- Operating several stores/platforms,
- Have foreign owned LLC forms that are complicated to file.
5. What are effective recordkeeping practices for a dropshipping business?
Recordkeeping for dropshipping businesses is best done using digital tools such as QuickBooks, Xero, or Wave. These platforms allow users to track income, expenses, and store important receipts without much hassle.
Moreover, they enable accounts to be reconciled on a monthly basis which aids in accurate reporting, especially for tax obligations.
Swift and smooth tax filing, devoid of audits or penalties, is only achievable with accurate records.
