Affiliate marketing and taxes: What you need to know
If you’ve ever considered starting an affiliate marketing business, you might have also wondered about the potential downsides. Taxes, for example, can be a scary prospect for any business owner.
And while it’s true that new businesses often come with unexpected challenges, taxes are almost always something you need to think about from day one.
Fortunately, if you are operating your own affiliate marketing business and have registered as a self-employed individual (or sole proprietor), there are some tax benefits that come standard with this type of company structure. Read on to learn more about taxes and the pros and cons of being an affiliate marketer...
What is affiliate marketing?
Affiliate marketing is a type of performance-based marketing in which an affiliate earns a commission by promoting a company’s products or services. In exchange for the promotion, the affiliate is given a special link to the company’s website that they can use to track their commissions.
Affiliate marketing is one of the most popular ways to monetize a blog or an online business, and it’s a great way to earn passive income in your spare time.
Affiliate marketing has been around for decades, but it’s only recently become a viable way to make a full-time living online. The rise of internet marketing has changed the way we earn online, and affiliate marketing has become a go-to marketing strategy for many companies looking to increase their online sales.
Tax benefit of being an affiliate marketer
The most significant benefit of being an affiliate marketer is the potential to earn a lot of tax deductions. Let’s take a look at some of the most common deductions to see how affiliate marketing can help you save on taxes.
The most significant tax deduction for affiliate marketers is the cost of goods sold (COGS). This is the money you spend on the products or services you’re promoting to your audience. As an affiliate marketer, you can deduct this from your taxable income if you itemize deductions on your tax return.
Other deductions you might be able to take advantage of as an affiliate marketer include travel expenses and advertising expenses like business cards, flyers, and websites. You may even be able to deduct the costs of managing your business such as health insurance, payroll taxes, and office supplies.
Negatives of being an affiliate marketer
Affiliate marketers can look forward to some pretty hefty deductions, but there are also some negatives to consider before quitting your day job to become an affiliate marketer. One of the biggest downsides of being an affiliate marketer is having to pay self-employment taxes.
For most people who work a 9-5, 10% of their income is automatically deducted and put towards their FICA taxes (Social Security and Medicare). Because affiliate marketers are self-employed, they are responsible for paying the entire FICA tax themselves.
This means that, depending on the size of your affiliate marketing income, you could be paying thousands of dollars in FICA taxes each year.
Another downside of affiliate marketing is that it can take a while to build up your income. It’s not unusual for affiliate marketers to only earn about $50 per month for their first 6 months of working online. This is one of the reasons why many people who try affiliate marketing end up quitting before they earn any significant income.
How to stay on top of your taxes as an affiliate marketer
First and foremost, don’t wait until the last minute to file your taxes. This is especially true if you’re an affiliate marketer who will be claiming significant deductions. If you’re under a lot of pressure to file by a certain date, you might end up missing important deductions.
If you’re starting a new business, you’ll want to claim your affiliate marketing income on your taxes as soon as possible. Depending on how you earn your affiliate marketing income, you may want to file as early as April of that year.
If you’re filing as an affiliate marketer and you also have a 9-5, you might want to hire an accountant to file your taxes. If you only have a few deductions, an accountant could end up costing less than you’d pay in interest if you file on an extension.
Affiliate marketing offers many benefits, but it can also be challenging to navigate the tax landscape. If you’re an affiliate marketer, it’s important to keep track of your business expenses, and it’s a good idea to keep a record of your earnings in case you have to file an audit.
If you’re a new affiliate marketer, it can take time to build up your income, so be patient and don’t expect to be earning a lot of money right away. However, if you’re able to make affiliate marketing a long-term source of income, it can be a great way to earn extra money in your spare time.