Affiliate Marketing and Income Taxes
Making money from affiliate marketing is a beautiful thing. Paying income taxes is not nearly as fun. Nevertheless, you can't have one without the other. Not legally, anyhow.
Contrary to certain bogus wives tales about the Internet being a tax-free zone, you must pay federal and state income tax on income derived from affiliate marketing just the same as income derived from any other form of self-employment. You'll notice, for example, that major affiliate networks such as Commission Junction demand your social security or employer ID number before granting you a license to sell. They give that info directly to the IRS, you know.
We would encourage you to consult a tax professional for personalized advice about affiliate marketing and income taxes. In the meantime, here are the basics:
Affiliate Marketing Deductions: Rack'em Up
When you work for someone else as a W-2 wage earner, your employer pays half of your social security and Medicare taxes. When you are self-employed, you must pay your social security and Medicare taxes on your own. These taxes are in addition to federal and state income taxes.
In short, the combined tax rate for self-employment income can be quite high. Depending on what your state tax is (if you have one) and how much income you have for the year, the tax rate on your net profit from affiliate marketing can easily reach up into the 40 percent range.
To counter this horrendous situation, you are going to need tax deductions. Luckily, as a self-employed Internet business guru, you have tax deductions available to you. PPC spend, website development, seminar fees, and home office expense are good places to look for affiliate marketing deductions.
The home office deduction can be particularly important because it can help you write off part of your rent or mortgage, as well as any utility bills related to your residence. Just make sure to review IRS rules for using the home office deduction before claiming it.
By using deductions wisely, you can legally, ethically, and substantially reduce the income tax due on your affiliate marketing income.
Best Income Tax Advice Ever: Don't Try to Be a Hero
With New York, Rhode Island, and now North Carolina instituting a so-called "Amazon Tax" on affiliate marketers, tax compliance issues related to affiliate marketing have started to gain recognition and create confusion.
Even if you live in one of the states that has this extra affiliate marketing tax issue added on, though, your best source of income tax advice related to affiliate marketing is simple:
Don't try to be a hero. If you're making income, pay income taxes.
The amount of income tax due will vary, of course, depending on factors such as how much money you're making from affiliate marketing and how many deductions you claim, but 20 percent for the federal and 5 percent for the state is usually a decent benchmark.
If you're paying those percentages, don't worry, be happy.
And keep good records.