How are online businesses taxed? Taxes for online and virtual businesses with no storefront

• Sole proprietorship or single-member LLC. Profit goes on Schedule C with your Form 1040. An LLC adds liability protection but not a different federal tax by default.
• S corporation election. Once profit is steady, an S election can reduce self-employment tax by splitting income into a reasonable salary and distributions. See LLC vs S corp.
• C corporation. Usual for venture-backed SaaS. See SaaS startup taxes.

Form your entity in the state where you live and work. A Wyoming or Delaware LLC run from Virginia or Maryland usually also has to register in Virginia or Maryland, so you pay fees in two states. See Virginia LLC taxes or Maryland LLC taxes.

An online business still has a physical home: where you and your team work.

• Your home state. As a resident, you pay tax there on all your income, including business profit.
• States where you have employees. A remote employee generally means you withhold that state’s income tax and register for unemployment insurance. It can also give the business income tax nexus there.
• States where you have contractors or inventory. Inventory, such as stock in a fulfillment center, is physical presence. In some states, contractors working for you can also create nexus. Check each state.
• States with economic nexus for income tax. Some states assert income or franchise tax nexus based on sales into the state alone. The federal protection in P.L. 86-272 covers only solicitation of orders for tangible goods, so it does not cover services, SaaS or digital products.

If your business is a pass-through, income apportioned to another state can mean a nonresident return for you there. See multi-state nexus.

Physical goods. You collect sales tax in states where you have physical presence or pass the economic nexus threshold. DC, Maryland and Virginia use $100,000 in sales or about 200 transactions. Amazon, Etsy and other marketplaces collect on sales made through them. Your own website sales are your job. See e-commerce sales tax and economic nexus.

Digital products, courses and SaaS. Taxability depends on the state. Maryland taxes most digital products at 6%. DC taxes many digital goods and software. Virginia generally does not tax electronically delivered products. See is SaaS taxable?

Services and consulting. Many professional services, such as consulting, are not subject to sales tax in DC, Maryland or Virginia. But DC taxes some services, and since July 1, 2025 Maryland taxes certain data, IT and software services at 3%. Other states tax other services. Check before you assume.

Form 1099-K. Payment platforms file Form 1099-K when your payments exceed $20,000 and more than 200 transactions in a year. The One Big Beautiful Bill Act restored this threshold retroactively, per IRS Fact Sheet 2025-08. The 1099-K shows gross payments, before refunds and fees. Report your actual income whether or not you get one.

Self-employment tax. If net earnings from self-employment are $400 or more, you owe self-employment tax of 15.3%: 12.4% Social Security, up to the yearly wage base, and 2.9% Medicare. You deduct the employer-equivalent portion when figuring income tax.

Quarterly estimates. No one withholds tax from business income. Pay estimates with Form 1040-ES if you expect to owe $1,000 or more. See quarterly tax planning.

Home office. If you use part of your home regularly and exclusively for business, you can deduct it under IRS Publication 587. The simplified method allows $5 per square foot, up to 300 square feet.

Bookkeeping. Reconcile platform payouts to gross sales, fees, refunds and sales tax. Track inventory and cost of goods sold if you sell physical products. See e-commerce accounting.

Best for: online sellers, digital product creators, SaaS founders, consultants and content creators who work from home or as a remote team.

1. Free initial consultation. Tell us what you sell, where your customers and team are, and how you are set up.
2. Fees quoted upfront, in writing. Transparent, fair fees in an engagement letter.
3. Setup review. We check your entity, state registrations and sales tax exposure.
4. Books and estimates. Monthly bookkeeping and quarterly estimate planning.
5. Returns. We prepare your federal and state tax returns.