7 Things You Need to Know About Affiliate Marketing Taxes

Affiliate marketing has become a go-to for entrepreneurs and content creators who want to boost their revenue without building a product from scratch. This performance-based marketing strategy allows virtually anyone to earn a commission by promoting products or services for other companies. 

If you want to know just how popular affiliate marketing is, consider this: around 16% of all eCommerce sales in the United States and Canada come from affiliate sales! 

Shocking, yet impressive, right? 

The low barrier to entry and scalable income affiliate marketing offers make it a popular choice for full-scale businesses as well as side hustles.

However, as your affiliate marketing income grows, so do your tax obligations. While dealing with taxes may seem intimidating at first, knowing your options and responsibilities will make this part of your business a whole lot easier.

Today, I'm going to share some key things you should know about affiliate marketing taxes. You'll learn what to look for, mistakes to avoid, common guidelines, and much more. 

On that note, let's get started! 

When to Pay Affiliate Marketing Taxes

First, you'll need to know if you need to pay affiliate marketing taxes. There's no doubt that knowing when and how to pay taxes on your affiliate income is vital for staying in compliance and avoiding penalties. 

Here are some quick factors that you'll need to consider to determine if and when you need to pay taxes on your affiliate marketing earnings. 

1. Tax Obligations Vary – First and foremost, you need to understand that tax obligations can vary by country and state. Always consult local tax laws or a professional for advice specific to your situation.
   
2. U.S. Income Threshold – In the U.S., the general rule is that you need to report your affiliate marketing income if you earn $600 or more in a year. This is the total income from all your affiliate programs combined.
   
3. No Automatic Tax Deductions – Unlike traditional employment, where taxes are withheld from your paycheck, affiliate marketing income comes to you with no tax deductions. So, you need to set aside money to pay taxes later.
   
4. Types of Taxes – As an affiliate marketer, you don't need to worry about collecting or paying sales tax since you're not directly selling products. But you do need to pay:
   • Self-employment tax
   • Federal income tax
   • State income tax (in most states)
     
5. Tax Deadline – For U.S. taxpayers, the deadline to file your annual tax return is April 15, often referred to as “Tax Day”. But if you're earning significant income from affiliate marketing, you may need to make quarterly estimated tax payments throughout the year (more on this later).

How Affiliate Income is Classified

Understanding how the IRS categorizes your affiliate marketing income is key to proper tax reporting and maximizing your deductions. Let's get into the two main categories.

Self-Employment Income

Most affiliate marketers fall into this category. In fact, 77% of affiliate marketers identify as solopreneurs who run their own businesses. When your affiliate marketing is considered self-employment:

• You're running a business.
• You can deduct business expenses.
• You pay self-employment tax.

Hobby Income

Sometimes, affiliate marketing is categorized as a hobby rather than a business. This has big tax implications:

• You must report all income.
• You can't deduct expenses that exceed your hobby income.
• You don't pay self-employment tax, but you do pay income tax.

Real-World Examples

Self-Employment: Jonathan spends 20 hours a week creating content for his tech review blog, earns commissions consistently and reinvests in his business by buying new gadgets to review. His affiliate marketing is likely self-employment.

Hobby: Mike occasionally posts affiliate links on his personal social media accounts when he finds products he likes. He doesn't have a strategy or dedicated time for this activity, so his affiliate marketing is considered a hobby.

The distinction between hobby and business is important. The IRS looks at time commitment, effort to increase profitability, and whether you depend on the income. If you're serious about affiliate marketing, it's generally better to categorize your activities as a business rather than a hobby.

Key Tax Forms You'll Need to File

We all know that navigating tax forms can be intimidating and even frustrating, but understanding the key documents for affiliate marketers can simplify the process.

Here are the essential forms you'll likely encounter:

1099-MISC or 1099-NEC

These forms are provided by affiliate programs or networks to report your income.

1099-MISC was traditionally used, but as of 2020, non-employee compensation is reported on the 1099-NEC.

You'll receive these forms if you've earned $600 or more from a single affiliate program in a year.

Note: Even if you don't receive a 1099, you're still required to report all income.

Schedule C

This is the form used for reporting business income and expenses.

As a self-employed affiliate marketer, you'll use this form to calculate your net losses and profits.

It's also where you'll detail your revenue and itemize your business expenses. The net income calculated on Schedule C is then transferred to your Form 1040.

Form 1040-ES

This form is used for estimated tax payments.

As a general rule, if you owe 1,000 dollars or more in taxes when you file your return, you probably need to make quarterly estimated tax payments.

These payments help you avoid surprise tax bills and penalties at the end of the year.

Remember, while these are the primary forms for most affiliate marketers, your specific situation might require additional documentation. It's always wise to consult with a tax professional or use reputable tax software to ensure you're completing all necessary forms accurately.

By familiarizing yourself with these forms and keeping detailed records throughout the year, you'll be well-prepared when tax season arrives, which will allow you to spend more stress-free time on your business. 

Deductible Expenses for Affiliate Marketers

One of the perks of treating affiliate marketing as a business is you can deduct expenses. These can add up to a big chunk of your taxable income, which means you have to pay less at the end of the year. Let's go through some common deductible expenses with examples so you can see what's eligible:

• Home Office Deduction – If you use a part of your home exclusively for your affiliate marketing business, you may qualify for this deduction. For example, if your home office is 10% of your living space, you could deduct 10% of your rent or mortgage interest, utilities, and home insurance.
  
• Website and Hosting Costs – These are a must for most affiliate marketers and are 100% deductible. Monthly hosting fees from Bluehost, domain registration costs, and website theme purchases fall under this category.
  
• Marketing and Advertising Expenses – Any money spent promoting your affiliate links or content is usually deductible. So, social media ad spending, costs for email marketing software, and fees for influencer collaborations all count. 
  
• Equipment and Software – Tools needed to create and manage your affiliate content are deductible. For you, this means Laptops, cameras, microphones, editing software licenses, and productivity tools are typically covered.
  
• Professional Development and Education – Expenses related to improving your affiliate marketing skills are usually deductible. Online courses, digital marketing seminars, or certifications in relevant fields can be deducted.

Remember, to claim these deductions, you need to keep detailed records and receipts. It's also crucial that these expenses can be tied back to your affiliate marketing business.

Estimated Tax Payments

As an affiliate marketer, you're generally considered self-employed, so you're responsible for paying your own taxes throughout the year. This is where estimated taxes come in.

Why Estimated Taxes are Needed

The U.S. tax system is a “pay as you go” system. When you're an employee, your employer withholds taxes from each paycheck. As a self-employed affiliate marketer, you need to do this yourself since you are your own boss.

If you expect to owe $1,000+ in taxes annually, you're generally required to make estimated tax payments. Many affiliate marketers find that making estimated tax payments helps ease their burden because they don't need to make a lump sum payment each year.

Step-by-Step Guide to Calculating and Paying Quarterly Taxes:

1. Estimate Your Annual Income. Based on your earnings so far and projections for the rest of the year, estimate your total annual income.
   
2. Calculate Your Estimated Tax. Use Form 1040-ES to calculate your estimated tax, including self-employment tax and income tax.
   
3. Determine Your Quarterly Payments. Divide your estimated annual tax by 4 to get your quarterly payment amount.
   
4. Mark the Payment Deadlines. Quarterly taxes are due April 15, June 15, September 15, and January 15 of the next tax year.
   
5. Make Your Payments. You can pay online through the IRS website, by phone, or by mail using the vouchers in Form 1040-ES.
   
6. Keep Records. Save a copy of all your payments for your tax records.
   
7. Adjust as Needed. If your income changes significantly during the year, recalculate your estimated taxes and adjust your payments accordingly.

As always, these are general guidelines. Your situation may be different, and it's always a good idea to consult with a tax pro, especially when you're first setting up your estimated tax payments. By doing so, you'll avoid surprises at tax time and keep your affiliate marketing business in good standing with the IRS.

Record Keeping Best Practices

Keeping records is the foundation of a financially healthy affiliate marketing business. It not only makes tax season less stressful but gives you valuable insights into your business. By keeping accurate records, you can report all income claims and every deduction you're eligible for and see where you stand.

Good record-keeping is your best defense in case of an audit. Keep all 1099's from affiliate programs, save receipts for every business expense (no matter how small), and keep a mileage log if you use your vehicle for business. Don't forget to document business meals and entertainment expenses with dates and purposes.

When it comes to retention, the general rule is to keep records for at least 3 years from the date you filed your tax return or 2 years from the date you paid the tax. This strategy will cover you in case of any future questions or audits.

Remember, the key to good record-keeping is consistency. Choose a system that works for you and stick to it all year. By doing so, you'll not only be prepared for tax time but also gain valuable insights to grow your affiliate marketing revenue. 

Common Tax Mistakes to Avoid

If you want your affiliate marketing strategy to run as smoothly as possible, your best bet is to avoid many of the common pitfalls. Here is a collection of common tax mistakes and what you should do instead. 

Underreporting Income

Not reporting all income can get you in big trouble, including penalties and audits. To avoid this, keep records of all your income, even from smaller affiliate programs. Cross-reference with 1099 forms, but remember you must report all income even if you don't get a 1099.

Missing Out on Deductions

Don't leave money on the table by overlooking eligible deductions. Some often forgotten deductions are home office expenses, the business portion of internet and phone bills, professional development costs, bank fees for business accounts, equipment depreciation, and health insurance for self-employed individuals. Pro tip: Keep a running list of potential deductions throughout the year so you don't forget any come tax time.

Not Paying Estimated Taxes

Not paying estimated taxes can get you penalized. With this in mind, set reminders for quarterly payment due dates and regularly set aside a portion of your income for taxes. Consider opening a separate savings account for tax payments so you can stay organized and have the funds when you need them.

Misclassifying Income

Mixing personal and business expenses can be a tax disaster. Keep separate bank accounts and credit cards for business use so you can clearly separate personal and business expenses. When in doubt about how to classify an expense, consult a tax pro.

Not Reviewing Tax Returns Carefully

Small mistakes can trigger audits or overpaying taxes. Before you submit your return, double-check all entries for accuracy, make sure all income sources, including passive ones, are listed and all deductions are categorized correctly. To minimize errors, consider using tax software or a pro, especially if your tax situation is complicated.

By knowing these mistakes and taking action to avoid them, you can cruise through tax season and keep your business in good standing.

Final Thoughts

As your affiliate marketing business grows, so does the complexity of your tax situation. While this guide is a good foundation, there will come a time when professional help is invaluable.

A tax professional or accountant can give you personalized advice, optimize your tax savings, and make sure you're compliant with changing regulations. Consider getting expert help if you're experiencing rapid income growth, going international, or feeling overwhelmed with taxes.

Understanding and managing taxes is part of your success as an affiliate marketer. Stay proactive by educating yourself on tax laws, keeping records, and adapting to changes. Treating your taxes like you do the rest of your business will make it much easier to navigate them and take your affiliate marketing plan to the next level.

This post was guest written by Syed Balkhi, a seasoned entrepreneur and the founder of WPBeginner, the largest free WordPress resource site.

Affiliate Link Disclosure