Affiliates Should Pay Income Taxes
The possibility of avoiding paying income taxes, or at least paying less income taxes than you actually owe, can be a highly appealing idea. Affiliate marketers who make money online would seem to have an advantage in being able to hide payments and avoid or reduce the income taxes due on those amounts.
However, this is a bad approach. Here's why:
They Have Your Name and Social Security Number
When a merchant sends you an affiliate marketing payment, you can bet your bottom dollar that they will be writing this off on their income tax forms as a marketing expense. That's why they give you that pesky W-9 form when you sign up for an affiliate program.
Don't forget that any reputable affiliate program will have your social security number and name and will be reporting payments made to you to the taxing authorities.
The most impactful thing that you can do, other than start your business, is close your business. The fact is that every business has a natural endpoint, a moment in time when it makes sense to move on to another venture.
When you don't report and pay taxes on all your business income, you will never be able to get a fair price when you go to sell your business.
Business financing that would allow another person or company to get a loan in order to purchase your business is dependent on reported income tax returns. Just think, if you were buying a business, what happens if the IRS or the state tax authority decides to pursue those unpaid taxes, and the business is under your name? Would you buy a business with that kind of death shadow hanging over it?
Neither would anyone else.
If you have underpaid your income taxes for any length of time, the value of your business, you may find, is significantly less than if you've always paid your fair share.
The problem with paying your fair share, when you're making money through affiliate marketing, is that if you're not careful, or even if you are, your fair share can rise into the tens of thousands of dollars per year.
Therefore, you have to handle your tax situation appropriately.
The major problem in the affiliate marketing income tax scenario is that the self-employment tax is at 15.3 percent, then you’ve got the real federal income tax at, say, 35 percent, and then if you’re in California like we are, you have another 10.3 percent on top of that.
The 15.3 percent SE tax only applies to your first $110,000 or so in income, and of course the rates named above are “marginal” rates, not real tax rates.
Nevertheless, you can easily end up losing 30-40 percent of your affiliate marketing income to income taxes, especially if you have a really strong year. Brutality!
Best Affiliate Marketing Tax Deductions: Home and Car
What is the difference between people who pay 30 and people who pay 40 percent, on the same income? The way you use your tax deductions. The way you set up your life to reduce your income tax burden legally and ethically.
The two best deductions you can use, that you must use, if you are making money online, is your housing and your vehicle costs. Set up a legitimate home office and you may, within the rules of the system, deduct a portion of your rent, mortgage, utility bills, etc.
Meanwhile, you need to make sure that when you travel by car, you travel for business. Stop by, pick something up, meet someone for lunch and talk about business, or do whatever you gotta do to make your mileage business, because miles are 55+ cents deduction per mile.
If you're in a high tax bracket, a 55 cent deduction can be worth 27 cents less in taxes. This means that essentially you are receiving 27 cents per mile when you drive business miles.
If you drive 10,000 business miles per year, that's $2,700 tax savings.
Keep a mileage log, though, or else you will get screwed if the IRS audits you.
No or Low Tax States
Another option that we would briefly mention that many super-affiliates choose is to do business in a low or no tax state. Certain states do not have an income tax, such as Texas, Florida, and Washington, and some other states have very low housing costs, such as Idaho and Arkansas.
Choosing to operate in a low tax, low cost state can mean savings of tens of thousands every year for a high-earning affiliate. If you do business over the course of five years, and invest correctly in your business, you can rack up a nice amount of capital.
However, if that capital is subject to taxes that you didn't pay, you can never sleep easily, no matter how much money you have stashed inside your mattress.