Affiliate marketing is a great way to earn some extra income and eventually turn into a full time career. However, if you make a profit and do not give the IRS a compulsory cut of it, you would find yourself in deep problems with the law. There are some basic taxes codes that are applicable to affiliate marketers, some useful tools to ensure great accounting and bookkeeping practices, information about 1099s, penalties for not paying taxes and great deductions that this article will discuss.
Tax Codes Applicable to Affiliate Marketers
There are five general taxes that an affiliate marketer needs to pay:
Sales Tax – This tax is charged on goods paid within the borders of a state. If there is an affiliate in a state, it means that business is being conducted in that state. After the Amazon case, it is best to seek legal help to find out whether you need to pay sales tax in a particular state or not.
State Tax – LLP tax or corporate tax might have to be paid by the affiliate marketing company in a state but it should be noted that this company and the selling company are two different entities.
Federal Income Tax – Incorporated companies might have to pay corporate tax and LLPs need to file informational returns. This is also where the W-9 comes into play.
Local Taxes – Local taxes include county related real estate tax and fixed asset taxes in some states.
Self Employment Tax – Affiliate marketers need to pay self employment tax in Medicare and Social Security.
Basic Bookkeeping Tips and Recommendations
For basic bookkeeping of your Affiliate marketing business, you can use a software program to make matters clean and simple. These programs will do most things for you. Here are some recommendations:
QuickBooks Pro – This is the best downloadable accounting software that includes invoicing, billing and all the other requirements of a professional running an affiliate marketing business. The bonus is that it is compatible with TurboTax, another introduction by Intuit for all tax related requirements of a business. QuickBooks Online is the online version of this program with less features but a lot of scalability.
Sage 50 – This program boasts of a variety of features and is the same as QuickBooks Pro in its basic features. The best thing about this program is that non-accountants can also use it effortlessly because it is extremely user friendly and has a dashboard that is extremely customizable.
Xero – People who want their bookkeeping and accounting software to be cloud based would love Xero. It is completely flexible and actually rather suited for service based businesses. Another great thing is that the basic plan of Xero starts pretty low which means that businesses can try it out without investing in it properly. The program has a lot of apps for small accounting functions like inventory management, and project tracking.
Basic 1099 Filing Information For Affiliate Marketers
Know Your Obligations – All affiliates need to file a W-9 form and the parent business company should keep those forms on file. If the affiliate crosses the $600 mark in sales during a year, 1099-MISC form also needs to be issued by the parent company.
Have The Right Bookkeeper – Choose a bookkeeper for your company who is familiar with 1099 requirements for affiliate marketers. When a new affiliate is paid the first commission, they should provide a W-9 and it should be filed. This is not necessary during sign up, though.
Hire a Professional For Past Problems – If you have not filed the requisite W-9 and 1099-MISC in the past, hire a professional as soon as possible to resolve the situation. This would prevent future issues with the IRS.
Look Out For Deductions
Remember that even if you get a freebie from a company, its cost has to be recorded in your books of accounts. You can, however, claim deductions for related expenses. There are many deductions you should look out for:
Domain Name Costs
Web hosting (both long term and monthly)
Premium themes used on sites
Seminars and conferences hosted for business
Expenses related to travelling to a conference like transportation, hotels, etc
Mileage expenses on events attended for business
Money spent on keyword research software programs
Business cards printed
Paid advertisements on sites
Designing or Photoshop software
Fees for using stock pictures
Cost of tax preparation
Email lists or autoresponder costs
Fees paid in postage
Giveaways hosted and prizes paid
If you have an office at your home that you primarily use for your business, it would become a home office and might fall under acceptable deductions.
Don’t Ignore 1099 Obligations
There are various penalties for inaccurate information and tax payments that you might want to avoid. For every 1099 that is not filed by you, you might have to pay $30 and the maximum penalty for this infraction is $250,000. For every 1099 that has been filed inaccurately in the past, the penalty is $250 and there isn’t any maximum limit for this. Plus, if there are no 1099s by the parent company, the IRS could construe this as a tax withholding situation and 28% on the amounts of 1099 might have to be paid by the company on the behalf of the affiliate(s).
The best tip is to read up on new tax information for affiliate marketers and stay aware about different legal tax saving options that can be used. As with any financial advice, contact an experience professional tax consultant to ensure you’re doing everything you can to stay on the right side of the tax man.