Does Shopify Report Sales to IRS? Essential Tax Info

Table of Contents

1. Introduction
2. The Core Question: Does Shopify Report Sales to the IRS?
3. Navigating Tax Compliance as an E-commerce Merchant
4. Diversifying Income with Digital Products
5. Maximizing Deductions and Profitability
6. Moving Your Community to Shopify
7. Simple and Transparent Pricing
8. The Importance of Professional Guidance
9. Practical Steps for Tax Season Readiness
10. Conclusion
11. FAQ

Introduction

In late 2021, the Internal Revenue Service sent ripples through the e-commerce community by announcing a significant shift in reporting thresholds for third-party settlement organizations. While the implementation of the lower $600 threshold has faced several delays and administrative updates, the underlying question for every merchant remains the same: how much does the government actually see of my hard-earned revenue? For many entrepreneurs, tax season is a period of high anxiety, clouded by the complexity of forms like the 1099-K and the fear of unintentional non-compliance. At Tevello, we believe that understanding the fiscal side of your business shouldn’t be a barrier to growth, but rather a foundation for building a sustainable, "digital learning powerhouse."

The purpose of this blog post is to clarify exactly how and when Shopify reports your sales to the IRS. We will break down the mechanics of the 1099-K form, identify who is eligible to receive one, and discuss the critical differences between sales tax and income tax. Furthermore, we will explore how diversifying your store with digital products and community features can simplify your revenue tracking while significantly boosting your margins. By the end of this article, you will have a clear roadmap for managing your tax obligations, allowing you to focus on what you do best: creating value for your customers and growing your brand.

Understanding your reporting requirements is the first step toward long-term business stability. Whether you are selling physical goods, digital courses, or membership access, staying informed ensures that you can scale with confidence, knowing your financial house is in order.

The Core Question: Does Shopify Report Sales to the IRS?

The direct answer is yes, but the "how" and "when" are determined by specific federal regulations and the payment processors you use. It is a common misconception that Shopify itself acts as the reporting agency for all transactions. In reality, it is the payment settlement entity—most commonly Shopify Payments—that handles the reporting.

Understanding the 1099-K Form

The primary vehicle for this reporting is the IRS Form 1099-K, officially titled "Payment Card and Third-Party Network Transactions." This document provides a summary of the gross amount of all reportable payment transactions. For a Shopify merchant, this means every dollar processed through Shopify Payments is tracked. At the end of the year, if you meet the federal or state-specific thresholds, a copy of this form is sent to both you and the IRS.

It is vital to note that the "gross amount" reported on the 1099-K does not account for any deductions. It includes the total sales price, shipping fees, and taxes collected. This means the number on the 1099-K will almost always be higher than your actual taxable income. This is why record-keeping is so essential; you must be able to justify the expenses, refunds, and fees that bridge the gap between your gross sales and your net profit.

Current IRS Reporting Thresholds

The thresholds for receiving a 1099-K have been a topic of much debate and recent change. For the 2024 tax year, the IRS has continued to move toward a lower reporting threshold, though they have implemented a phase-in approach. Historically, the threshold was $20,000 in gross sales and 200 transactions. However, the American Rescue Plan Act originally sought to drop this to a mere $600.

Currently, the IRS is treating 2024 as a transition year. While the $600 threshold is the eventual goal, the IRS has suggested a "wait and see" approach for some, while still requiring payment processors to report for those who exceed the older $20,000/200 transaction mark in many cases. Regardless of whether you receive a form, the legal obligation to report all business income remains. Even if you only made $1,000, you are still required to report that income on your tax return.

Navigating Tax Compliance as an E-commerce Merchant

Tax compliance is more than just filling out a form in April; it is an ongoing process of data management. As a merchant, you are essentially the bridge between your customers and the tax authorities.

Income Reporting Responsibilities

Your primary responsibility is to report your net profit. This is calculated by taking your gross revenue (the total amount of money that came into your business) and subtracting your business expenses. For those using our platform to sell digital goods, this often results in much higher margins. When you use Tevello to turn your Shopify store into a digital powerhouse, you are effectively reducing the complexity of your "Cost of Goods Sold" (COGS).

Unlike physical products, which require tracking inventory, shipping costs, and packaging supplies, a digital course or membership has a one-time creation cost followed by very low maintenance expenses. This clarity in your financial records makes it much easier to reconcile your 1099-K with your actual bank deposits. To ensure you are keeping 100% of what you earn from these high-margin sales, we offer predictable pricing without hidden transaction fees.

Sales Tax vs. Income Tax

One of the most frequent areas of confusion for Shopify store owners is the distinction between sales tax and income tax.

• Income Tax: This is a tax on your business's profits. It is a federal (and often state) tax that you pay based on how much money you made after expenses. The 1099-K helps the IRS verify this figure.
• Sales Tax: This is a consumption tax that you collect from your customers on behalf of state and local governments. Shopify helps automate the calculation of these rates, but it is your responsibility to register for sales tax permits in the states where you have "nexus" (a significant business presence) and to remit those funds to the state.

Crucially, the sales tax you collect is often included in the gross amount reported on your 1099-K. When you file your income tax, you will list the sales tax remitted as an adjustment so that you aren't paying income tax on money that was never yours to begin with.

Diversifying Income with Digital Products

One of the most effective ways to manage the "tax drag" and increase your business's resilience is to diversify your revenue streams. We often see merchants who started with physical products realize that they can amplify their efforts by adding a digital component.

Practical Scenario: The Artisanal Coffee Roaster

Consider a merchant who sells premium coffee beans on Shopify. Their physical business involves thin margins, complex shipping logistics, and physical inventory that must be tracked for tax purposes (Beginning Inventory + Purchases - Ending Inventory = COGS).

By using Tevello, this merchant can create a "Home Barista Masterclass" video course. This course requires no shipping, no storage space, and no physical materials. Once the content is created, every sale is nearly pure profit. Because our app offers all the key features for courses and communities, the merchant can also host a monthly "Bean Club" membership where enthusiasts discuss brewing techniques.

From a tax perspective, this digital revenue is incredibly "clean." There are no shipping labels to write off, no damaged goods to account for, and no warehouse fees. It is simply revenue that supports the growth of the overall brand. If unifying your stack is a priority, start by a flat-rate plan that supports unlimited members.

The Tevello Advantage: Data Ownership and Native Integration

A major concern for merchants is "platform risk." If you use a third-party platform to host your courses, you often lose control over your customer data, and your customers are forced to create separate logins on a different URL. We believe merchants should own their customer experience.

Our "Native Shopify Integration" ensures that your digital products live directly inside your Shopify store. Your customers never leave your domain, and they use the same account for both physical and digital purchases. This not only builds brand loyalty but also simplifies your financial reporting. All your sales—whether for a bag of coffee or a $200 course—are consolidated within your Shopify admin, making it much easier to verify the data on your 1099-K. This is the power of keeping customers at home on the brand website.

Maximizing Deductions and Profitability

While the IRS is looking at your gross sales, you should be focused on your net profit. Maximizing your legal deductions is the most effective way to reduce your tax liability.

Common Write-offs for Shopify Sellers

Every dollar you spend to operate your business can potentially reduce your taxable income. Common deductions include:

1. Shopify Subscription Fees: The monthly cost of your Shopify plan.
2. App Fees: Fees for tools that help you run your business, like Tevello.
3. Marketing and Ads: Spend on Facebook, Google, or Instagram ads.
4. Home Office: A portion of your rent/mortgage and utilities if you have a dedicated workspace.
5. Professional Services: Payments to accountants, tax professionals, or legal advisors.
6. Education: Courses or books you buy to improve your business skills.

The Financial Advantage of 0% Transaction Fees

Many "all-in-one" course platforms charge what they call "success fees"—a percentage of every sale you make. These fees can quickly eat into your profits, especially as you scale. For example, if a platform takes 5% of your revenue and you make $100,000 in sales, you’ve just handed over $5,000 for no additional service.

At Tevello, we reject this model. We provide a simple, all-in-one price for unlimited courses. Whether you have ten students or ten thousand, we charge 0% transaction fees. You keep 100% of your earnings. This transparency makes your tax planning much more predictable. You know exactly what your software costs are every month, rather than having to calculate a fluctuating percentage based on your sales volume.

We have seen this model work for many different types of creators. For example, you can see how one brand sold $112K+ by bundling courses while keeping their overhead low. By generating revenue from both physical and digital goods, they built a robust business that isn't dependent on a single product type.

Moving Your Community to Shopify

Beyond just selling courses, building a community is one of the best ways to increase Customer Lifetime Value (LTV) and ensure recurring revenue. Recurring revenue provides a level of financial stability that makes tax planning and business forecasting much more accurate.

Community Features and Native Hosting

When you host your community on a third-party social media platform, you are at the mercy of their algorithms and policy changes. By bringing your community into your Shopify store, you create a "walled garden" where you control the rules. Tevello includes robust community features such as:

• Member Directories: Allow students to find and connect with each other.
• Social Feeds: Create a space for discussion, questions, and brand updates.
• Profiles: Let your members showcase their progress and identity within your brand.

This level of engagement drives repeat purchases. We’ve seen merchants achieve incredible results by generating over €243,000 by upselling existing customers. These retention strategies that drive repeat digital purchases are far more cost-effective than constantly hunting for new leads. From a tax and accounting perspective, a stable, recurring revenue stream from memberships is much easier to manage than the "feast or famine" cycle of individual product launches.

Simple and Transparent Pricing

We believe that as your business grows, your software costs shouldn't punish you for your success. Many apps use tiered structures that get exponentially more expensive as you add more students or content.

The Unlimited Plan

Our pricing is designed to be the simplest part of your business. For $29.99 per month, you get the Unlimited Plan. This isn't a "lite" version; it is our full-featured powerhouse. This plan includes:

• Unlimited Courses and Students: Grow your audience without limits.
• Unlimited Video Hosting and Bandwidth: No need to pay for external hosting services like Vimeo or Wistia.
• Full Community Features: Profiles, directories, and social feeds are all included.
• Quizzes and Drip Content: Tools to enhance the learning experience.
• 0% Transaction Fees: We never take a cut of your sales.

By offering a simple, all-in-one price for unlimited courses, we enable you to calculate your ROI with ease. You don't have to worry about hidden "per-user" fees as your community scales. Before you commit, you can start your 14-day free trial and build your first course now to see exactly how it fits into your workflow.

The Importance of Professional Guidance

While this guide provides a comprehensive overview of how Shopify reports to the IRS, it is not a substitute for professional tax advice. Every business is unique, and tax laws vary significantly by jurisdiction and business structure (Sole Proprietorship, LLC, S-Corp, etc.).

We highly recommend working with a Certified Public Accountant (CPA) who understands e-commerce. A good CPA won't just help you file your returns; they will help you structure your business to be as tax-efficient as possible. They can help you navigate the complexities of "nexus" for sales tax and ensure you are taking advantage of every possible deduction related to your digital and physical operations.

When you present your CPA with a unified financial statement from Shopify—one that includes your digital courses, your physical products, and your membership subscriptions all in one place—you save them time and yourself money. This is the beauty of seeing how the app natively integrates with Shopify.

Practical Steps for Tax Season Readiness

To make your next tax season the smoothest one yet, we suggest implementing the following habits:

1. Weekly Reconciliations: Spend 30 minutes every week matching your Shopify payouts to your bank deposits. This prevents a massive headache in January.
2. Digital Receipt Storage: Use an app or a simple cloud folder to snap photos of every business-related receipt.
3. Separate Bank Accounts: Never mix personal and business finances. This is the single biggest mistake new Shopify merchants make.
4. Monitor Your Thresholds: Keep an eye on your "Finance" reports in Shopify to see how close you are to the $20,000/200 transaction mark (or the newer $600 goal).
5. Invest in High-Margin Assets: Use the 14-day trial to build out a digital product. The higher margins of digital goods provide a financial cushion that makes tax payments much less painful.

Conclusion

Understanding the reporting relationship between Shopify and the IRS is essential for any merchant who wants to build a lasting brand. While the 1099-K form might seem intimidating, it is simply a tool used by the government to ensure transparency in the digital economy. By maintaining meticulous records, maximizing your deductions, and diversifying your income with high-margin digital products, you can turn tax compliance from a source of stress into a routine part of your business operations.

At Tevello, our mission is to provide you with the tools to "turn any Shopify store into a digital learning powerhouse." We believe in a future where merchants own their data, keep their customers on their own URL, and enjoy the benefits of a truly integrated e-commerce ecosystem. With our transparent, flat-rate pricing and 0% transaction fees, we are here to support your growth every step of the way.

To build your community without leaving Shopify, start by reviewing the Shopify App Store listing merchants install from.

FAQ

Does Shopify automatically pay my taxes for me?

No. While Shopify can help calculate and collect sales tax from your customers, it does not remit those taxes to the government, nor does it pay your income tax. It is the merchant's responsibility to report their income to the IRS and remit sales tax to the appropriate state authorities.

What should I do if my 1099-K shows more money than I actually received?

This is common. The 1099-K reports "gross" sales, which includes shipping, taxes, and even the amounts from refunded orders. You must keep detailed records of your expenses, refunds, and fees so that you can subtract them from the gross amount on your tax return to arrive at your actual taxable income.

If I don't receive a 1099-K, do I still need to report my sales?

Yes. The IRS requires you to report all business income, regardless of whether a 1099-K form was issued. If your sales are below the current reporting threshold, you should use your Shopify "Sales Finance" reports to determine your total revenue for the year.

How do digital products change my tax reporting?

Digital products generally simplify your record-keeping because they don't involve physical inventory or shipping costs. This makes your "Cost of Goods Sold" much easier to calculate. However, digital products are still subject to income tax and, in many states, sales tax. Always check the specific laws in your jurisdiction regarding the taxation of digital goods.