Network Marketing Tax Deductions
Network Marketing — the OG of the side hustle, gig economy, and non-celebrity influencers. Chances are you’ve had family or friends dabble in network marketing at some point. Network marketers act as solo distributors for wholesalers. It’s sort of like running a franchise, but you’re primarily selling to friends, family, or colleagues, and you’re generally working out of your house as an independent contractor. There are lots of networking marketing tax deductions. The list of eligible deductions vary based on the style of distribution or structure, so let’s start by getting a better understanding of network marketing.
Three types of network marketing
Single Tier Marketing:
When you’re a single tier network marketer, you work alone, without other sellers working with you or alongside you. You egange directly with consumers or end users to generate income, and you probably work from home. Avon is an example of a company using a network of single tier marketers selling direct to customers.
Another common variation of single tier network marketing is affiliate marketing online. You, the “affiliate,” use digital advertising, usually on social networking platforms and direct traffic to a business online. In return for promoting their brand and sending them traffic, the business pays you a referral fee or commission. Amazon is an example, with tens of thousands of websites linking to products on Amazon for commissions of 4-8%.
Two Tier Marketing:
When you’re a two tier network marketer, you can choose to work with others to grow your business, paying them a portion of your income to send business your way. Like the single tier, you probably still work from home as an independent contractor.
Multi-Level Marketing (MLM):
When you’re a network marketer under the MLM model, the business builds a network of independent contractors with each level in the “downline” sharing in the income from direct sales to customers or clients. Amway and doTERRA are examples of MLMs.
Many people prefer the work-from-home arrangement to traditional in-office or in-store jobs. So, if you are considering network marketing or affiliate marketing from home as your new business and income source, you’re in good company.
Tax Deductions for the Affiliate or Non-Inventory Network Marketer
You can sell products as a network marketer without maintaining an inventory. Dropshipping is extremely popular. With dropshipping, a customer places an order on your website and the supplier of the inventory packs and ships the product directly to the customer. With dropshipping, you don’t need to maintain any inventory.
You could also do affiliate marketing. Suppose you have a strong presence on social media – you have a lot of followers with lots of engagement. A lot of your content is centered around better health through supplements and natural products. If you’re an Amazon Associate, you have thousands of linking opportunities to products you recommend. Amazon will create a unique link, so when your followers click and are redirected the product page on Amazon, you get credit for what they buy.
Now, consider what’s required to operate your business. Pretty much, you need a computer and Internet access. That’s it. You’d probably be surprised with the how many tax advantages available to network marketing and affiliate marketing.
Home Office Deduction
If you work from home, you may qualify for a sizable home office deduction. Talk with an accountant or tax expert about eligibility, but if you dedicate a space in your home to your business, you could take several expense deductions. The space must be dedicated only to your business, so you can’t use a spare bedroom if you also use it for guests. It must also be your primary place of business, not secondary to an office elsewhere. Using an example space that’s 120 square feet in a home with a total size of 1,400 square feet would be 8.6% of the home.
Now, if your office space qualifies, you’d be able to deduct 8.6% of the following expenses:
- Rent (if you rent your home)
- Mortgage interest
- Utility bills, including electric, gas, water, trash, etc.
- Home insurance
- Real estate taxes
This can add up to a nice deduction against your business income, but there’s a simplified method if you don’t want the hassle. You can deduct a flat $5/square foot up to 300 square feet. That would be 120 x $5 = $600 for the above example.
Office Equipment Deduction
If you buy a computer and printer dedicated solely to your business, you can deduct their cost in the year purchased using the IRS Section 179 deduction. This is a deduction that avoids having to depreciate their value over time. This could apply to other specialized equipment for the business. For more expensive office equipment you may need to depreciate it over time rather than taking the full deduction in the first year. Talk with your tax pro to determine what’s right for you.
Office Supplies Deduction
Everything you buy from printer paper and ink supplies to mailing or shipping supplies are deductible if you use them in the business. Others include:
Marketing and Advertising Deduction
You can deduct the cost to host and maintain your website, any software for the website, and any online advertising costs. If you’re running Facebook ads, the cost is deductible. Depending on your online marketing, others may include:
- WiFi costs
- Special photo equipment
- Software for photo editing or website design
- Stock photo fees
- Business cards
- Domain name registration
From mailing costs to phone bills, you may be able to deduct some business-related costs. If you use your cell phone for business, estimate a conservative ratio of business vs. personal use. If you host Zoom or GoTo meetings or webinars for business, the subscription fees are deductible as well.
If you use your personal vehicle for business, you can deduct a portion of your ownership and operational costs. There are two methods to choose from, but both require a detailed log of all trips, mileage, and whether for business or personal use. If you have the log, here are the two methods:
- Actual Expenses – you can keep records of all fuel, oil, repairs, loan interest, lease fees, and other costs to operate your vehicle. You can then use the mileage log to determine the percentage of use for business. Example: if you traveled 32,000 miles during the year and 6,000 of them were for business, 6000 / 32000 = .1875 or 18.75% business use. You can deduct that percentage of your vehicle expenses.
- Standard Mileage Deduction – each year the IRS states the per/mile deduction you can take for business miles. In 2022, it is $0.585, or 58.5 cents/mile. You can just take the number of business use miles and multiply by this allowed amount.
Travel, Entertainment, and Meals Deductions
This one gets complicated, if for no other reason than it is a moving target some years due to changes in the rules. Just know that some business meals and entertainment for business clients or customers may be deductible. Travel expenses 100% business-related can be deductible as well if for a reasonable business purpose. Make sure to keep receipts and detailed records and talk with your accountant or tax expert.
Commissions, Referrals, or Other Fees Deductions
If you’ve hired independent contractors to help, you may be able to deduct commissions, referral fees, and other related expenses.
Qualified Business Income (QBI) Deduction
You can get excited about this one because you don’t have to do much of anything to qualify to take it. The deduction is 20% of your qualified business income. Generally, the following businesses qualify for the QBI deduction:
- Sole proprietors
- Limited Liability Companies (LLCs)
Basically, “qualified business income” is your business’s net profit. So, a $100,000 net profit after other deductions would allow you to take 20% off or reduce your taxable income to $80,000. There are income upper limits, so check those for the tax year.
Other Deductions for Network Marketers
As a network marketer, you could claim these and other deductions, especially if you are in a specialty business and the expenses are reasonable, customary, and necessary for the business.
Cost of Goods Sold (COGS) for the Network or MLM Marketer
If you stock inventory, and if you pay for it, you need to do another tax calculation before deducting other expenses. If the company supplies inventory to you at no cost, it’s not necessary. If you pay for inventory that you sell to customers, you must do a COGS calculation. You should consider asking an accountant to help with this, but a COGS calculation involves these steps:
- Value the inventory at the beginning of the tax year
- Book expenses to buy, stock, ship, deliver, and manage inventory during the year
- Do an inventory at the end of the tax year
The difference between the beginning and ending inventory will be your Cost of Goods Sold. This is a deduction against income to arrive at Gross Profit before your other deductions to come to Net Income.
There are more opportunities than ever for people to start and operate a business, work from home, and take advantage of tax deductions for business. The key is to keep detailed records and work with an experienced tax advisor.