What Are the Tax Implications for My Network Marketing Company?
Network marketing is an amazing business for the solopreneur. You can not only profit from your own expertise and efforts, but also the skills and work of others. By leveraging your business expertise through the recruitment of others, you increase your income, but you pass through tax liability. Your downline is composed of independent contractor businesses responsible for their own tax returns.
You are an independent contractor as well, and you’ll get an IRS Form 1099 reporting your income from the company whose products you’re selling. You only get one if you make more than $600 in the tax year or buy more than $5,000 of inventory, but if you’re not, you won’t be in the business long anyway. So, what are other tax implications of your network marketing business?
The Basic “Is it a Business” Question About Network Marketing
The IRS has a very different set of rules for expense deductions for a hobby versus a business. If your business doesn’t make money in three out of five years, it could be classified a hobby, at which time your business deductions are not allowed. This often isn’t a worry for network marketers, as they end up out of business anyway if they’re losing money their first two years.
Another part of this hobby-versus-business determination is whether you appear to be operating as a business, not a sideline that makes a little money. Do you have the things considered as business tools and materials, possibly some of these?
- Business stationary
- A website
- Social media business page(s)
- An office or space at home dedicated to your business
- Marketing and sales materials
- Dedicated phone number for the business
- 100% business use vehicle
- Rented space for business use
Basically, the IRS wants to see an honest effort to make a profit rather than a way to write off personal expenses.
Business Expenses and Deductions
As a serious network marketer, especially if you’re successful, you are spending time and money promoting, marketing, and operating your business. In doing so, you’re going to have valid business expense deductions to offset income for taxes. Those can include:
- Home office expenses – If you do not have another location where you conduct the management of your business, you may be able to take deductions for a home office. You’ll have to prove that you use the designated space solely and regularly for your business. If you have an allowable home office, you can deduct proportional expenses based on the size related to your residence size. These include insurance, utilities, mortgage payments, and repairs.
- Necessary and ordinary business expenses – there are several expenses that come with operating and marketing all businesses. From accounting, advertising, licensing, and maintenance to telephone, computers, business equipment, and office supplies, they should all be deductible if they’re reasonable.
- Business use of a vehicle – if you have a vehicle dedicated to 100% use in the business, then all expenses and depreciation should be deductible. If you’re using a personal vehicle, you can deduct actual expenses. However, it’s easier to keep a record of business mileage for your deduction. There are phone apps that help you to easily record and report your vehicle business use.
- Travel, meals, and entertainment – this can get tricky, as you must validate the business purpose of these activities, including who and why for meetings, business meals, and entertainment. Meals and entertainment are now deductible at 50% of the actual expense amount.
The key to staying on the right side of the IRS and avoiding audits and penalties is to do a really good job of record-keeping. It is strongly recommended that you maintain a separate bank account for the business to record income and expenses separate from the personal side. These days, the IRS is willing to accept electronic records, and it’s getting a lot faster and easier to use a smartphone app to take photos of receipts and track your mileage.
All this stuff only matters if you’re serious about making a profit as a network marketer. If you are, then keep good records, make smart business decisions, and take every legal write-off available to you.