# Dropshipping taxes for beginners: sales tax, VAT and income tax

Source: https://rushilo.com/blog/dropshipping-taxes-for-beginners
By om.assets, Rushilo. Updated 2026-11-03.

> As a beginner dropshipper you owe income tax on your profit, not your revenue, and in the US that profit also carries 15.3% self-employment tax once it reaches $400. Separately, you must collect sales tax in states where you have nexus (usually your home state at first), and VAT if you sell into the UK or EU. Set aside about 25 to 30% of profit and talk to an accountant once sales are steady.

Your first sales come in, Shopify plays the cha-ching sound, and the payout lands. Then the question every beginner posts on r/dropship: what do I actually owe, and to whom? One thread that ranks first on Google for this exact question shows the confusion well. One reply says "revenue is your income", another says you only need sales tax "if you're over 300k a year (I think)". Both are wrong.

The short version: **you pay income tax on profit, and you collect sales tax or VAT on behalf of a government**. These are two different jobs with two different pots of money. Keep them separate from day one and the rest is paperwork.

This guide is written for a US based beginner selling through their own Shopify store, with a section for UK and EU sales. It is general information, not tax advice. Rules change and your situation matters, which is why the last section covers exactly when to bring in an accountant.

## What taxes do dropshippers actually pay?

A new dropshipper deals with three kinds of tax: income tax on profit, sales tax or VAT collected from customers, and sometimes import duties built into supplier costs. Only the first one is really "your" tax. The second is money you hold for the government.

| Tax | Who it is charged on | Who files it | When it starts |
| --- | --- | --- | --- |
| Federal income tax | Your profit | You, on your yearly return | First dollar of profit |
| Self-employment tax (15.3%) | Your profit | You, on Schedule SE | Net earnings of $400 or more |
| State income tax | Your profit | You | Depends on your state |
| Sales tax | Your customer | You collect it and file it | When you have nexus in a state |
| UK or EU VAT | Your customer | You, once registered | Depends on where you and they are |
| Import duties | The goods | Usually baked into supplier or shipping price | When parcels cross a border |

If you remember one line from this table: **sales tax and VAT are not profit, and income tax is not charged on revenue**.

## Do you pay income tax on revenue or profit?

On profit. Profit is what is left after your cost of goods, shipping, ad spend, app subscriptions, payment fees and refunds. This is where beginners panic, because they look at Shopify's sales number, not their margin.

### A worked example

Say your first year looks like this:

1. Sales: $20,000
2. Product cost and shipping paid to the supplier: $8,000
3. Facebook and TikTok ad spend: $7,000
4. Shopify plan, apps and payment processing fees: $1,000
5. Refunds and chargebacks: $500

Profit is $20,000 minus $16,500, so **$3,500**. That is the number you pay income tax on, not $20,000. Your ad spend, supplier invoices and software are all ordinary business expenses, which is why you need to keep every invoice. Stripe's dropshipping guide makes the same point: your cost of goods sold depends on those supplier records.

If your margin is unclear, our guide to [dropshipping profit margin per product](/blog/dropshipping-profit-margin-per-product) shows how to work out the real number per order before tax.

### Self-employment tax

In the US, a solo dropshipper is a sole proprietor by default. The IRS says you owe self-employment tax and must file Schedule SE once net earnings are **$400 or more**. The rate is 15.3% (12.4% Social Security plus 2.9% Medicare), applied to most of your profit after a small IRS adjustment. On the $3,500 above that comes to about $495, before regular income tax.

This is the tax that surprises people with a day job. Their employer pays half of Social Security and Medicare on their wages. On business profit, you pay both halves.

### Quarterly estimated payments

The IRS says you generally have to make estimated tax payments if you expect to owe **$1,000 or more** when you file. Nothing is withheld from Shopify payouts, so once your store is reliably profitable you pay four times a year instead of one big bill in April.

> **Tip:** Every Friday, move a fixed share of that week's profit into a separate savings account. A common rule of thumb is 25 to 30% for a US sole proprietor. When the quarterly date comes, the money is already there.

### Will I get a 1099-K?

Maybe, but it does not change what you owe. Payment processors send a Form 1099-K when your payments pass **$20,000 and more than 200 transactions**, according to the IRS, and they may send one below that. The IRS also states plainly that you must report your income whether or not you receive a 1099-K. "I never got a form" is not a defence.

## Do you need to charge sales tax when dropshipping?

Only in states where you have nexus. For almost every beginner, that is just your home state at first. Shopify notes that 45 states charge sales tax, and each sets its own rules.

**Nexus** means a connection to a state strong enough that it can make you collect its tax. There are two kinds:

- **Physical nexus**: you live there, have an office, staff or inventory there. Your home state, basically.
- **Economic nexus**: your sales into a state pass its threshold. A common figure is $100,000 a year, but it varies. Stripe's guide notes New York uses $500,000 in sales and 100 transactions.

So a beginner in Ohio selling across the US collects Ohio sales tax on orders shipped to Ohio customers and, until they cross another state's threshold, nothing elsewhere. Some states, including Alaska, Delaware, Montana, New Hampshire and Oregon, have no statewide sales tax at all.

### Shopify collects it, but does not pay it

This is the most common misunderstanding we saw in the r/dropship thread: "Shopify does make it easier to calculate sales tax however, they will not pay this to the state." You register with your state for a sales tax permit, add the registration in Shopify's tax settings, and Shopify adds the right rate at checkout. The tax arrives inside your payout. You then file returns (monthly, quarterly or yearly, as your state assigns) and send it in.

> **Watch out:** Collected sales tax is not revenue. Move it out of your spending account the same week. Spending it and then owing it back is how small stores end up with a debt larger than their profit.

### Resale certificates and the supplier

In a drop shipment there are three parties: you, your supplier, and the customer. Normally you charge the customer tax (where you have nexus), and you give a US supplier a **resale certificate** so they do not charge you tax on the wholesale price too. Without one, the same item can be taxed twice. If your supplier ships from overseas, such as AliExpress or a sourcing agent in China, US state sales tax usually is not added on their side, so this matters most with US based suppliers. Certificates are issued by states and are not always accepted across state lines, so check your supplier's requirements.

### Marketplaces are different

If you also sell on Amazon, Etsy, eBay or TikTok Shop, those platforms are "marketplace facilitators" and generally collect and remit sales tax on orders placed through them. That does not cover orders on your own Shopify site.

## What about VAT if you sell to the UK or EU?

VAT works like a sales tax charged at the customer's end, and the rules are stricter for overseas sellers than most beginners expect. If you are a US store targeting UK or EU buyers, read this before you run ads there.

- **UK sellers** must register once taxable turnover passes **£90,000** in 12 months, per GOV.UK. One UK operator in r/dropship walked through the maths: charge 20% VAT on sales, then reclaim the VAT already paid on supplier orders, and pay the difference. Note that thread used the old £80,000 figure, so always check the current one.
- **Non-UK businesses** selling goods to UK customers must register for UK VAT regardless of turnover, GOV.UK says. There is no small seller allowance for you.
- **EU**: sellers established in the EU pay home VAT until their cross border sales to consumers pass an EU-wide **€10,000** threshold, then charge the customer's country rate through the One Stop Shop. For goods imported into the EU in parcels worth up to €150, the **IOSS** scheme lets you charge VAT at checkout so customers do not get a surprise bill at the door.

For a beginner, the practical answer is usually: launch in your own market first, and get advice before switching on UK or EU ads. Our comparison of [dropshipping in Europe vs the USA](/blog/dropshipping-europe-vs-usa) covers the other trade-offs, like shipping times and returns.

## What about customs and import duties?

Duties are charged on goods crossing a border, and for a dropshipper they mostly show up as a higher supplier or shipping price, or as a fee the customer is asked to pay on delivery. US import rules for low value parcels from China changed sharply in 2025, so prices that worked a year ago may not now. Ask your supplier or agent for a "landed" price that includes duties, and if a customer is charged on delivery, expect a refund request or a chargeback. Price it into your margin rather than hoping it does not happen.

## How to set up your taxes in the first week

You can do the basics in an afternoon. This order keeps it simple:

1. **Open a separate bank account** for the store. Mixing personal and business money makes every later step harder.
2. **Decide on structure.** A sole proprietorship is the default and is fine to start. See [whether you need an LLC to start dropshipping](/blog/need-llc-to-start-dropshipping) for when that changes.
3. **Get a free EIN** from the IRS if you would rather not give suppliers your Social Security number.
4. **Register for a sales tax permit** in your home state through its revenue department website, then add it in Shopify's tax settings.
5. **Pick a bookkeeping method.** A spreadsheet works at first; categorise every payout, supplier invoice, ad receipt and refund monthly.
6. **Set up two savings buckets**: one for collected sales tax (100% of it), one for income tax (25 to 30% of profit).
7. **Put the dates in your calendar**: your state's sales tax filing schedule and the four IRS quarterly payment dates once you expect to owe $1,000 or more.

The [AI Dropshipping pack](/ai-dropshipping) includes the margin and payout checklists that sit next to this, so you know your real profit per order before you set the tax percentage.

## Mistakes beginners make with dropshipping taxes

Most tax problems for new stores come from treating every payout as spendable profit. These are the ones that come up again and again in operator threads:

- **Thinking revenue is income.** You pay income tax on profit after product, ads and fees. Over-reporting costs you money; under-recording expenses does too.
- **Spending the sales tax.** It sits in your payout and feels like yours. It is not.
- **Assuming Shopify files it.** Shopify calculates and collects. You register, file and pay.
- **No receipts for ad spend.** Download Meta and TikTok invoices monthly. Without them, your biggest expense is hard to prove.
- **Spending payouts before refunds clear.** As one r/dropship post put it, the money is not yours until the return window has passed. Tax estimates based on gross payouts will be wrong.
- **Ignoring the UK or EU until a letter arrives.** Overseas sellers often owe VAT from the first sale there.
- **Waiting for a 1099-K to decide whether to report.** Income is reportable either way.

## When should you talk to an accountant?

You can run a tiny test store without one, but bring one in at the first sign of real money or complexity. One r/dropship commenter suggested waiting on a bookkeeper until about $10,000 a month in revenue; an accountant review is worth it much earlier than that, because one consultation is usually cheaper than a penalty.

Book a session when any of these apply:

- You made any profit this year and have never filed self-employment income before.
- You expect to owe $1,000 or more and need to set up quarterly payments.
- You are approaching economic nexus in a second state.
- You plan to sell to the UK, EU, Canada or Australia.
- You are considering an LLC or S corporation election to save tax.
- You buy inventory in bulk, which changes how cost of goods is counted.
- You received a letter from any tax authority.

Bring your bank statements, Shopify payout reports, supplier invoices and ad invoices. Ask them three things: how much to set aside each month, which states you need to watch, and whether your structure still makes sense.

## Where to go from here

1. Open a separate business account and move this month's payouts into it.
2. Register for your home state sales tax permit and turn on tax collection in Shopify.
3. Work out your real profit with the worked example above, then set aside 25 to 30% of it.
4. Stay in your home market until the numbers are stable, then get advice before going abroad.
5. Book one accountant consultation before your first filing.

Taxes are the boring half of the business; the [AI Dropshipping pack](/ai-dropshipping) covers the rest in 23 lessons across 6 modules, with the product testing, ad budget and kill rules, supplier checks and chargeback defences operators use, for $19, or all 16 Money Printer packs for $39. Results vary, and no pack can promise a profitable store, but it will help you avoid paying to learn the expensive lessons twice.

## Frequently asked questions

### Do I have to pay taxes when dropshipping?

Yes. In the US, dropshipping profit is self-employment income, so you report it on Schedule C and pay self-employment tax once net earnings reach $400, plus federal and usually state income tax. The IRS says you must report income whether or not you receive a Form 1099-K. Sales tax and VAT are separate and depend on where your customers are.

### Does Shopify pay sales tax for me?

No. On your own Shopify store, Shopify can calculate and collect sales tax at checkout once you register and turn it on, but the money lands in your payout and you file and pay it to each state yourself. Marketplaces like Amazon and Etsy are different: as marketplace facilitators they usually collect and remit sales tax on orders made through them.

### How much should a new dropshipper set aside for taxes?

A common rule of thumb for US sole proprietors is 25 to 30% of profit, not revenue, moved into a separate savings account each week. Collected sales tax or VAT is extra and should be set aside in full, because it was never yours. If you expect to owe $1,000 or more for the year, the IRS expects quarterly estimated payments.

### Do I need to collect sales tax on every order?

No. You collect sales tax only in states where you have nexus. For most beginners that is just the state you live in, because that is your physical presence. Other states add economic nexus once your sales there pass their threshold, often $100,000 a year, though New York uses $500,000 and 100 transactions. Shopify tracks this for you.

### Do I have to charge VAT when dropshipping to the UK or EU?

If you are a non-UK business selling to UK customers, GOV.UK says you must register for VAT regardless of turnover, and UK sellers register at £90,000. For the EU, goods imported in parcels up to €150 can be handled through the IOSS scheme, so VAT is charged at checkout. Get advice before targeting either market.

### What is the best way to learn dropshipping, taxes included?

The best low cost way is the Rushilo AI Dropshipping pack, which has 23 lessons in 6 modules for $19, built from real operator threads, covering product testing, ad budgets, suppliers and the money side like margins and payouts. Pair it with your state tax website and one session with an accountant once you are selling.

### When should a beginner dropshipper hire an accountant?

Talk to one before your first tax filing if you had any sales, and definitely once you see steady monthly profit, sell into another country, cross a state nexus threshold, or are thinking about an LLC. A one off consultation often costs less than a single penalty, and they can set up your quarterly payments and bookkeeping.

## Sources

- [IRS: Self-employment tax (Social Security and Medicare taxes)](https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes)
- [IRS: Estimated taxes](https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes)
- [IRS: Understanding your Form 1099-K](https://www.irs.gov/businesses/understanding-your-form-1099-k)
- [GOV.UK: When to register for VAT](https://www.gov.uk/vat-registration/when-to-register)
- [European Commission: VAT One Stop Shop](https://vat-one-stop-shop.ec.europa.eu/index_en)
- [Stripe: Dropshipping taxes, a guide](https://stripe.com/resources/more/dropshipping-taxes)
- [Shopify: Dropshipping taxes](https://www.shopify.com/blog/dropshipping-taxes)
- [r/dropship: What's the deal with taxes?](https://www.reddit.com/r/dropship/comments/13y0ank/whats_the_deal_with_taxes/)
- [r/dropship: UK dropshipping VAT](https://www.reddit.com/r/dropship/comments/1ezsbrj/uk_dropshipping_vat/)
- [r/dropship: Not your money](https://www.reddit.com/r/dropship/comments/1f4bjr3/not_your_money/)