Do You Have to Pay Taxes on Dropshipping? (What U.S. Sellers Must Know)

Dropshipping is a retail model where you sell products without physically handling inventory. When a customer places an order, it goes directly to your supplier, who then ships it straight to them. You’re the middleperson.

The storefront. The BRAND!

But while you’re skipping the shipping label drama, one thing you can’t skip? Taxes.

Do you have to pay taxes on dropshipping?

That’s where things get…messy. Sales tax, income tax, nexus rules, everything still applies to you even if you are relying on dropshipping.

And if you’re not careful, you could end up with penalties and surprise bills.

But don’t worry, we’re going to break down what you actually need to know about U.S. tax obligations as a dropshipper.

By the end, you’ll know what to collect, what to file, and how to stay compliant without being puzzled every quarter.

Do You Have to Pay Taxes on Dropshipping?

Yes. If you’re making money from dropshipping, you have tax obligations. Period.

Now you might be wondering:

 “Okay, but what kind of taxes are we even talking about here?”

There are two main types of taxes you need to care about as a U.S. dropshipper: Income tax and Sales tax

1. Income Tax

This is what you owe to the IRS (and possibly your state) based on the profit you make from your business. It doesn’t matter if you made that money selling candles, cat collars, or custom crocs via dropshipping, profit is taxable.

You report it when you file your annual return, just like any other business owner.

2. Sales Tax

This one’s trickier. Unlike income tax, you don’t pay this out of your own pocket. Your customers do.

But you’re responsible for collecting and sending sales tax to the right state.

That is, if you have nexus (a tax connection) in that state.

Income Taxes for Dropshippers

Just like we talked about in the last section, income is a tax on the profit your business makes. Not your total sales. Just what’s left after expenses.

Who Needs to File Income Tax as a Dropshipper?

If you earned more than $400 in net profit from your dropshipping store in a year, the IRS wants you to file your income tax returns.

How Much You Might Owe?

🛒 Hobby Dropshippers (Just Getting Started)

• If your total net income (revenue minus expenses) was under $400, you technically don’t have to file self-employment tax, but you can still file to report the income and potentially deduct your expenses.

• If you expect to grow your store, it’s smart to file early and build a clean track record.

💼 Side Hustle Dropshippers (Making Consistent Sales)

If your net income exceeds $400, you’re considered self-employed by the IRS and must file:

• Federal income tax return (Form 1040)

• Schedule C to report business profit/loss

• Schedule SE to calculate self-employment tax (that’s your Social Security + Medicare)

🧑‍💻 Full-Time Dropshippers or High-Earning Stores

You’ve replaced your 9–5. This is your main income stream, then you need to:

• File federal and state income tax (if your state requires it)

• Make quarterly estimated tax payments if you expect to owe more than $1,000 in taxes annually

• Possibly consider forming an LLC or S Corp to manage tax more efficiently

📦 LLC/Corporation Owners

Even if your LLC hasn’t made a profit, you still might need to file:

• A zero-income return for the LLC

• Or your portion of the LLC’s income (pass-through) on your personal taxes

C Corps must file separate returns regardless of profit and S Corps file a corporate return but income flows to your personal return (Form K-1)

Book a demo for more granular info!

Let’s further unpack that based on different categories of dropshippers.

Sales Tax: When and Where You Must Collect It

If you remember from earlier, sales tax is a tax paid by your customer when they buy a product.

Your job is to collect it, then send it to the state.

But here’s the catch:

You’re only responsible for collecting it in states where your business has something called nexus, and that’s where the real complexity begins.

Nexus basically means you have a “connection” to a state strong enough that the state can require you to collect sales tax.

1. Physical Nexus

If your business touches a state physically, even just a little, that state sees you as “in business” there.

You have physical nexus if:

• You live or work in that state (even from your bedroom)

• Your dropshipping supplier has a warehouse there and ships on your behalf

• You store inventory in an Amazon FBA warehouse in that state

• You hired a remote contractor or employee based there

Example: you’re a Florida-based dropshipper using a U.S. supplier with a fulfillment center in Nevada. That fulfillment center = physical nexus in Nevada, even if you’ve never been there.

2. Economic Nexus

You trigger economic nexus in a state when you sell a lot to its residents, even if you’re working from your laptop in a different state (or country).

Most states set economic nexus at:

• $100,000+ in sales or

• 200+ transactions annually to customers in that state

Example:  If you’re based in Florida but make $120,000 in sales to California customers through your Shopify store, then you’ve got economic nexus in California. And you’re expected to register, collect, and remit sales tax there.

💡 Every state has its own rules. Some care about revenue only. Some count transaction volume. Some care about both. 

Now you might be thinking:

“This all sounds like a lot… but wait, what if I’m selling on Amazon, Etsy, or Walmart? Don’t they take care of sales tax for me?”

The answer is: Sometimes, yes.

Thanks to something called the Marketplace Facilitator Law, major platforms like Amazon, Etsy, Walmart Marketplace, and eBay are legally required to collect and remit sales tax on your behalf, but only for the orders processed through their own platforms. 

🔖 Related Read: A Guide to Amazon Taxes for Online Sellers in 2025

What If You’re a Non-U.S. Resident Running a U.S. Dropshipping Business?

If you’re a non-resident who runs your business entirely from outside the U.S., doesn’t have any U.S. employees, agents, or physical office presence, then you likely do not owe federal income tax. Even if your LLC is registered in the U.S!

This is backed by the U.S. tax code under “effectively connected income” (ECI) rules.

However, this doesn’t mean you’re off the hook completely.  If you do have a U.S.-based agent, staff member, warehouse, or fulfillment partner that performs core business functions on your behalf, that can trigger income tax liability, because it implies your business operations are being conducted on U.S. soil.

So, the keyword here is presence.

Without that U.S. presence, non-resident founders typically aren’t subject to federal income tax, but that doesn’t mean they have no tax-related responsibilities. Which leads us to..

Sales Tax Obligations for Non-Resident Dropshippers

Unlike federal income tax, sales tax is state-controlled, and states don’t care whether you’re a citizen, resident, or even physically in the country.

If you sell physical products to U.S. customers, and you meet certain thresholds, the states you sell into may require you to collect and remit sales tax.

Here’s a detailed table outlining the sales tax registration requirements by state, including economic nexus thresholds, physical nexus rules, and marketplace facilitator law.

U.S. Tax Filing Requirements for Non-Residents (Even If No Tax is Owed)

The 5 Most Critical Tax Mistakes Dropshippers Make

Here’s a contextualized breakdown of five major tax mistakes dropshippers make:

1. Not Filing Taxes At All (Even When You Should)

Many dropshippers assume that if they’re just starting out or operating from outside the U.S., they don’t need to file taxes. This idea is potentially damaging.

If you’re a U.S.-based seller (even a sole proprietor with no LLC), and you make over $400 in net income, you are legally required to file a tax return with the IRS. 

That includes:

• Form 1040 (your personal income tax return)

• Schedule C (to report business income)

• Schedule SE (for self-employment tax)

If you’re a non-U.S. resident with a U.S.-based LLC, you’re required to file Form 5472 + a pro forma Form 1120, even if your LLC earned no income. This is a compliance requirement.

Penalties for missing this filing start at $25,000 per year, per entity, and increase with each year of neglect.

2. Not Registering For Sales Tax Where Nexus Is Triggered

Sales tax is not federal, it’s governed at the state level.

Each state has the right to enforce its own rules about when you, as a business owner, are required to collect and remit sales tax from buyers in that state. This requirement is triggered when you have nexus in a state.

Failing to register in states where you’ve triggered nexus leads to uncollected sales tax, which can’t be retroactively charged to the customer, meaning you pay out of pocket when the state audits you.

This mistake is often unintentional. Sellers rarely track their customer geography until it’s too late.

And by then, multiple states may be watching!

🔖 Related Must-Read: What Are the Ongoing Compliance Requirements for an LLC? A Complete Guide by doola

3. Ignoring Nexus Triggered By Influencers, Remote Workers, Or U.S.-Based Contractors

This one’s new and easily overlooked.

Most dropshippers think nexus only comes from warehouses or crossing transaction thresholds. But you can also trigger nexus by working with people inside the U.S.

Examples that create physical nexus:

• A virtual assistant based in New York

• A content creator in California who’s paid regularly to promote your products

• An influencer in Texas who stores your sample products for unboxing videos

• A fulfillment contractor you’ve hired in Arizona

Under state tax law, doing business through an agent or contractor located in the state can count as physical presence, meaning you may be required to register for sales tax in that state, even if you live abroad.

Influencer marketing has been mostly unregulated in tax policy, but states are catching up. And as remote work continues to dominate, more states are clarifying that even non-employee contracts can establish physical nexus.

The irony? A $300 shoutout could create a multi-state filing requirement that costs you hundreds more in back taxes and penalties.

4. Confusing Marketplace-Facilitated Tax Collection With Your Own Store’s Responsibility

If you’re selling on Amazon, Etsy, or Walmart Marketplace, these platforms are what states call “marketplace facilitators.” By law, they’re responsible for collecting and remitting sales tax on your behalf.

So if you make a sale through Amazon, you don’t need to:

• Register for a sales tax permit in that state

• Collect the tax yourself

• File sales tax returns for those transactions

Amazon handles it for you. The same applies to Etsy and Walmart.

Now, here’s where many dropshippers get it wrong:

They assume Shopify, WooCommerce, or BigCommerce also handle sales tax the same way Amazon or Etsy does. But that’s not true.

These platforms are not marketplace facilitators. They simply provide the tools, you’re still the one legally responsible for:

• Determining where you have nexus

• Registering with those states

• Setting up the correct tax rates in your store

• Filing and remitting sales tax on time

What happens if you don’t?

• You might undercharge customers and end up paying the tax yourself

• Or you might overcharge, leading to customer complaints, or worse, refund demands for collecting tax you weren’t authorized to take

For example, Shopify can calculate and apply sales tax at checkout, but it does not:

• Register you with state tax departments

• File your tax returns

• Or send the collected tax to the government

5.  Mixing Personal And Business Income (Without Separation or Documentation)

This one sneaks up on almost every new dropshipper.

In the early stages, it’s tempting to use your personal bank account for everything.

Payments from Stripe or PayPal are deposited there, ad spend is charged to a personal credit card, and product-related expenses like samples or packaging often get paid for without any formal tracking.

At first, it may seem manageable. But as revenue grows and expenses scale, this lack of separation quickly becomes a liability.

From a tax perspective, co-mingled funds significantly increase the risk of errors, missed deductions, and potential audits.

If you’re operating under an LLC and mixing personal and business finances, there’s also a legal concern: you may be at risk of losing your liability protection.

Courts refer to this as “piercing the corporate veil”, a situation where your business is no longer viewed as a separate legal entity because you haven’t treated it like one.

So, make sure you have a dedicated business bank account, even if you’re operating as a sole proprietor. Ensure that all business transactions, revenue, costs, and payments, flow through that dedicated account.

How doola Simplifies Dropshipping Taxes

All the mistakes we’ve covered, from confusing marketplace rules, missing sales tax registrations to mixing personal and business finances, are completely avoidable.

That’s exactly what doola is built for. Our Tax Filing Services are built for people like you, dropshippers who are figuring it out as they go, but still want to do it right.

Here’s how we make taxes simple.

🚀 Comprehensive federal and state tax filings

🚀 Sales tax registration and reseller certificate support

🚀 Catch-up tax filing services

🚀 Integrated bookkeeping and tax prep

And at the end of it all? Peace of mind.

You don’t need to be an accountant. You don’t need to guess.

You just need a system that runs quietly in the background, handles the forms, tracks the numbers, files on time, and tells you what to do before it becomes a problem.

That’s what doola gives you.

Want to stop worrying about taxes?

Book a demo with our team, we’ll walk you through exactly what you need to stay compliant, stay confident, and keep scaling.

FAQs

Do I need an EIN to pay dropshipping taxes?

Not always, but it’s highly recommended. If you’re operating as a sole proprietor, you can use your SSN.

But if you have an LLC (especially as a non-resident), you’ll need an EIN to file taxes, open a business bank account, and work with suppliers or platforms like Amazon.

How do I know if I have nexus in a state?

You likely have nexus if you meet one of two conditions:

• Physical Nexus – Your supplier ships from that state, or you have contractors there.

• Economic Nexus – You’ve made over $100,000 in sales or 200+ transactions in that state within a year.
  Platforms like doola or TaxJar can help monitor this for you.

Can I deduct dropshipping expenses like advertising and apps?

Yes, absolutely. Business-related expenses like Facebook/Google ads, Shopify fees, app subscriptions, domain renewals, and even a portion of your home office can be deductible.

Just make sure you’re tracking and categorizing everything properly.

Do I need to file taxes if I made less than $600 from dropshipping?

If you made less than $400 in net profit, you’re generally not required to file self-employment tax. But if you made $400 or more, even after expenses, you must file.

The $600 rule usually applies to 1099 forms from platforms—not your overall tax obligation.

What if I didn’t collect sales tax last year? What now?

You’re not alone, and it’s not too late. The best step is to work with a tax professional to get registered in the right states and consider a voluntary disclosure agreement (VDA) to reduce penalties.

Start collecting going forward and stay compliant moving ahead.