Tax Guide for Shopify and E-commerce Operators

Reporting Shopify Income on Schedule C

Shopify sellers report gross sales revenue on Schedule C, then deduct cost of goods sold, platform fees, shipping costs, and other qualified business expenses to arrive at net profit. Sales tax collected and remitted to states is not income. The 1099-K from Shopify Payments for 2026 reflects gross receipts — not net income.

1099-K from Shopify Payments at the $600 Threshold

For tax year 2026, Shopify Payments and other payment processors issue 1099-K forms to sellers who receive $600 or more in gross payments. The form must be reflected on the seller's tax return. The IRS cross-references 1099-K data against reported income.

Economic Nexus and Multi-State Sales Tax

Following South Dakota v. Wayfair (2018), most states require out-of-state sellers to collect and remit sales tax once they reach the state's economic nexus threshold — typically $100,000 in revenue or 200 transactions. Shopify tools assist with tax rates but do not handle nexus determination, registration, or filing.

Section 263A and the Small Business Exception

Section 263A (UNICAP) requires businesses above the applicable gross receipts threshold to capitalize indirect costs into inventory. The small business taxpayer exception (introduced by the TCJA) exempts businesses below the threshold, allowing the cash method for inventory. Most individual Shopify sellers qualify for this exception.

Business Deductions for E-commerce

Deductible expenses include cost of goods sold, Shopify subscription and transaction fees, payment processing fees, advertising, shipping, packaging, inventory storage, and software. A dedicated home workspace meeting the exclusive-use test may also qualify for the home office deduction.

Frequently asked questions

Do I need to collect sales tax in every state I sell to? +

Not necessarily. You must collect sales tax in states where you have nexus — either physical presence or economic nexus (typically $100,000 in sales or 200 transactions). States without a general sales tax do not require collection.

What accounting method should a Shopify seller use? +

Most small Shopify sellers can use the cash method under the small business taxpayer exception. The accrual method may be preferable for sellers who want revenue and expense timing to align with when transactions occur.

Does Section 263A apply to my small Shopify business? +

Most individual Shopify sellers are below the gross receipts threshold and qualify for the small business exception, exempting them from UNICAP capitalization requirements.