Running a business and being an entrepreneur is the dream of many people. With the Corona Pandemic, a lot of individuals dream of being financially independent and not worrying every day about their life. The spreading virus showed us how unstable our system and economy are. Many people cannot work anymore, have to be in their apartment 24/7 without having any income. Now many people see their future as an entrepreneur. They start their own business, mostly online, and can start to earn money.
That is exactly what happened to me. I had a job in a company, but the pandemic made it impossible and I lost my 40h job. I had no income. Luckily, I had some savings that helped me for a while. I was home like most people and didn´t know what to do. After some days of Netflix, worries, and more Netflix, I started to read magazines, listen to podcasts and watch videos. I have to be honest. That is what woke me up!
I started my own business selling products online. And it is doing great. But you know what I totally underestimated? All the work, knowledge, and research that has to be done. One of the biggest challenges for me was the tax system and understanding all the terms and words and if my business fulfills all conditions for filing for sales tax.
If you are new to this please check out the following terms that I will explain. It helped me a lot and I hope it will help you too!
You are located in a certain country and if you sell a product or service you have to collect the sales tax from your customers. This money you have to give to the government. Each sale has a certain percentage of sales tax which the government collects through the companies from the customers. Every business is responsible to collect, deposit, and report all the sales taxes.
Everywhere you hear that the nexus defines if you have to pay taxes. I was so confused about what it means. How do I know if I have a nexus or not? Well, nexus basically means connection. It describes the connection or presence your company has in a certain country. As I only sell in my home-based country this is my only nexus. Other businesses sell all over the world and might have a nexus with various countries.
Sales tax nexus
The nexus between your company and the government defines if you have to pay sales taxes in the country or not. Sales tax nexus is the specific connection and presence of a business that sells products or services in a country that requires to collect and report sales tax.
Economic nexus is a pretty young term. As there are more and more online businesses that sell all over the world, a new law defines the taxation for those. Economic nexus means that you have to pay sales tax in a certain country where you sell products or services and earn above a certain level of money. There are very detailed conditions and definitions that help you to understand when you have to file for sales taxes as an online business owner.