Let’s talk about self-employed tax tips for network marketers.
You found a product you love and made the decision to sell it. Awesome! I’ve seen the potential network marketing can have and I certainly relate to the desire to earn extra income and break free of the life sucking 9-5. I’ve seen people leave all sorts of traditional jobs and become full time network marketers and they end up much happier and more fulfilled than in any of their other careers.
Maybe you’re partially motivated by the discounts on products you already use and love, or maybe you’re putting all your effort into making sure this can lead to a full-time gig. I’ve met women who fall into either of these categories and they're both ok!
In either scenario, you definitely have to consider taxes because… congrats, lady! You’re self-employed now! Official #bossbabe status! Now not only are you able to use that hashtag, but the IRS is definitely going to treat you as self-employed. Have you stopped to consider what that means? If not, no worries, you're in the right spot now. Let's break it all down.
I’m passionate about female small businesses and really want you to succeed in all areas of your business, even the numbers side of things. My three big goals for female entrepreneurs are to see them save money, reduce risk, and remove stress. I'm sure you want those things, too!
With those goals in mind, there are 5 self employed tax tips I want you to know right off the bat.
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It’s important to develop a system to keep your income and expenses organized for a couple of reasons. The first is that it makes tax time so much easier. Keeping things organized as you go will save you time that is better spent working on the part of your business that makes you money. It will also save you money, because you won’t lose track of deductions and end up paying more in taxes than you should have because you don’t include those lost deductions on your tax return. This doesn’t have to be hard and mainly comes down to developing good habits.
My 4 tips to keeping your income and expenses organized are:
If this is your first dabble in entrepreneurship, you may not know about self-employment tax. I learned about this the hard way when I picked up a weekend gig in college, ended up getting a 1099 at the end of the year, and dropped in my $1,200 worth of self-employed earnings only to see that I owed over $400 on that alone which made my refund go to tax due. Gulp. Double gulp for a cash strapped college student who picked up this gig to make extra cash – cash which had already been spent.
Self-employment tax is paid in addition to income tax. Self-employment tax is 15.3% of business profits. Profits are your business income minus your business expenses, so the good news is you won’t pay self-employment tax on all income, just the amount you actually get to take home after paying your costs.
Rewinding back to my lesson learned the hard way, after extensive research trying to figure out what the heck just happened to my refund, I was able to rationalize this by learning that self-employment tax replaces payroll tax. In a nutshell, as an employee, 7.65% of your paycheck has payroll taxes taken right off the top that you never see and might not have been aware of. What you really might not know is that your employer is also paying 7.65% payroll tax to Uncle Sam on your wages. The IRS wants their money, and if you’re self-employed, they’re going to get it all from you.
SO – you’re only really paying an extra 7.65%, and if you ask me, that’s worth it to be my own boss. The big thing is you need to be prepared for it (unlike me), and you need to budget for it. If you’re starting to make considerable profits, you should really be making quarterly estimated tax payments to pay in your taxes throughout the year. This will make the sting less painful at tax time and also potentially save you in penalties for not making estimated payments.
There’s this dirty little part of tax law no one talks about enough, called the hobby loss rules. The hobby loss rules only apply to business activities that are losing money, so if you expect to make a profit right out of the gate and never look back, this may never apply to you (though it’s still a good concept to be familiar with).
Essentially, the IRS doesn’t like to see people who have other sources of income (like your full-time job, if you have one, or your husband’s income, if he has some), offsetting their income with losses from business activity that they see as something done for fun. Generally speaking, if you earned $100,000 from your full-time job and you claimed that your network marketing activity lost you $5,000, then you only pay tax on $95,000 of income, and you get to pay less in taxes than you would have if you hadn’t been running that network marketing gig.
It’s normal for start ups to lose money in the first year or even two, so that alone wouldn’t necessarily flag you for an audit. You can start to get in trouble when you consistently claim losses that offset other income and you don’t switch up your business practices to become profitable, don’t maintain proper records, don’t seek professionals, and otherwise don’t treat your business like a business – especially if there is an element of recreation involved in this activity. Like, um, say… selling products you love and use otherwise.
Here’s why you don’t want to be treated as a hobby. If you’re a hobby, the IRS still wants you to pay taxes on your income (different from profit… income is money received before deductions), BUT, you cannot take any deductions at all. If the IRS comes and audits you for 3 years and deems what you called business losses were actually hobby losses, they will disallow all deductions and hit you with a tax bill – plus penalties and interest.
Listen, I definitely don’t think you’re doing this as a hobby. ESPECIALLY since you’re reading this post and you’re still with me. But you’re going to need to CYA and treat your business like one – which means separating your personal and business funds, keeping records, and seeking professionals.
I’ve seen a lot of people make this mistake. The IRS wants you to report business income whether you earn $1 or $1,000,000. You will receive a 1099 from your network marketing company if you earn more than $600 in the year (if you’re earning commissions, it may be different if you purchase inventory from your company and then resell it. In that case, the threshold is even higher).
A 1099 is just a statement that reports your name, taxpayer ID, and the amount of income you received in the year. The IRS puts a threshold on this so they can easily match your taxpayer ID from the 1099 to the income you report on your tax return and see if you missed any income. They put a threshold on this to make the burden for the issuer (your network marketing company) not so awful, and so they’re not wasting their time with really small dollars.
HOWEVER – not receiving one doesn’t mean that’s not taxable income. It’ll make it easier for you to slip through the cracks, sure, but it doesn’t mean it’s not taxable. You’re required to report income whether or not you receive a 1099. It would also be very easy for the IRS to find out you were paid from your network marketing company, so I would strongly advise you report all of your income so that you’re not left open for an audit.
Yes, we all love deductions… and for good reason! No one likes paying more than they should in taxes and this is money you spent in order to make money, you’re entitled to it! I’m all for maximizing your deductions, but you just need to know how to do it the right way.
You need to be aware of the rules so that you don’t put yourself at risk under audit for taking the deductions too aggressively. If you get audited and find out you calculated your deductions wrong or didn’t keep the right records, you might end up owing the taxes you should’ve paid - plus penalties and interest - over a few year audit period. It adds up and it’s painful and I don’t want to see it happen to you.
As a network marketer, yes, you have several deductions you can use. You can definitely write off the business portion of your cell phone, business miles, perhaps a portion of your home internet if you work from home a lot (which you probably do), any products you bought for giveaways, samples, and promotions, mailing costs, business cards, advertisements you might run on your social media, website hosting fees if you’ve got them, and so on.
The areas I see people making mistakes a lot are with auto deductions, home office, cell phone, and meals. There are some special rules that apply to how you can take these deductions. These could all be separate blog posts, but I will touch on some misinformation briefly here.
If you’re claiming the standard mileage rate, you can’t also deduct gas. There is an estimate for gas in the standard mileage rate already, claiming gas would be double dipping. The standard mileage rate changes every year and is easy to google, it’s roughly 55 cents per mile which really adds up.
The home office deduction can be taken, but only if you have an area of your home that is used exclusively and regularly for business. For example, you can’t work from your bed and call that your home office.
You can deduct a portion of your cell phone bill, but it should be reasonable. If you only have one phone, it’s unreasonable to say it’s used 100% for business. However, maybe it really is your primary use and 85% is reasonable. This depends on you, so determine what it is and back up that claim.
The meals and entertainment deduction changed a lot starting January 1st, 2018. Essentially, meeting with a friend in town and talking about your product isn’t enough to qualify for a deduction anymore and it certainly can’t just be your morning coffee or your lunch. Be very careful using this deduction from 2018 on.
Another thing is that clothes you wear for work don’t count as uniforms, they need to be specialty clothing that’s used only for work (think hazmat suits), or clothing used for advertisement with your branding on them. Anything that could double as personal clothing (whether you wear it that way or not) won’t make the cut for uniforms.
While it sounds like solid reasoning, the products that you use personally don’t count as a deduction either. Market research will only get you so far. Keep track of your personal purchases separately (perhaps purchase them on a personal credit card) and don’t deduct this. It is overly aggressive and if you got audited, it could get you in trouble and toss your credibility out of the window with the IRS, who will now take little mercy on you elsewhere.
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