Affiliate Business Taxes: What You Need to Know
Starting a Home Based Internet Business
Starting a home-based business on the Internet is easy you say. You have your web page built, your affiliate links and you’re ready to go. Not really, you need to make sure you have all your i’s and t’s crossed when it comes to taxes.
Getting Started
First, you will need to register your business name with the city government. When I registered my business name with the city I was charged $11 — so expect to pay a small fee when filing this legal document with your local government.
Applying for an Employer Identification Number (EIN)
Second, you need to apply for an Employer Identification Number with the Department of the Treasury (IRS). To file for an EIN, you will need to complete Form SS-4. You can find these forms in post offices, public libraries, online, or by contacting the IRS.
Checking for Specific Licenses with Your State Government
Once you receive this document, keep it in a safe place — in other words, don’t crumple, stomp, or throw away — this identifies you and your business with the U.S. government and you will need this number when you file your taxes.
Third, you will need to check with your state government to determine if you need any specific licenses. Such as Retail Sales Tax Permit – if you are planning on selling items offline or online.
Opening a Business Account at Your Local Bank
Fourth, you may want to open a Business Account at your local bank once the money starts to roll in. Keeping your money separate from your family account — helps you to keep your accounting accurate for your business.
What percentage of your income will go to your State and Federal Government?
On average, You will need to pay the following taxes, at the following rate, on a quarterly basis:
States Taxes — 3.7%
Federal Taxes — 11.3%
Social Security — 12.4%
Medicare — 2.9%
Calculating and Reporting Income and Expenses in Your First Year
The first year in business is difficult, because you have no idea what you will be making–You will need to make a conservative guess. However, you will only pay what you owe against that of your expenses (your net income).
Quarterly Payments and Adjustments for Taxes Owed
For example, if you believe you will have $3000 in expenses during the year — and you believe in your first year, you will make $6000– you would report the following:
$6000 (Money Made)-
$3000 (Expenses)
= $3000 (What you owe)
This amount would be divided among the four quarters within the year and paid to your State Government and the Federal Government. If you find that you will be making more and you have paid in for one quarter -you will have to adjust the balance and divid it between the remaining quarters.
The following is what you will submit to the Federal Government:
1) Federal Taxes-11.3%
2) Social Security-12.4%
3) Medicare payment-2.9%.
The State Government will receive only the 3.7% of your net earned income.
(Please note: If you are unsure about anything, you should enlist the help of a CPA, regarding tax matters).
Your estimated taxes are due on the following dates throughout the year:
January 16
April 15
June 15
September 15
To obtain more specific information you can read IRS Publication 505: Estimated Tax payments.
Note: You are not required to make estimated tax payments until you have income not subject to withholding on which you will owe tax. If you don’t make your first payment until a later period, you must divide your entire estimated tax by the number of payment dates remaining.
Exceptions and Adjustments for Estimated Tax Payments
If, for example, you have three payment dates pending, you would pay one third of the total tax by June 15, the other third by September 15 and the last by January 15.
Typical Expenses To Deduct
Here is a list of some of the expenses you can deduct.
1. Your home mortgage
If you use a room solely for conducting business then you can take this deduction. There are a couple of different formulas to determine the percentage of your home that is used for your business.
You can use the “number of rooms” method or the “area method”. I would suggest using the “area method” because I can’t imagine having a home where all the rooms are the same size.
With the area method, you would take the area of your home office divided by the area of your home. Example:
Your Office= 10′ X 10′ = 100 square feet
Your home is 1000 square feet
Your deduction = 100/1000 or 10%
2. Indirect Expenses
With indirect expenses you will only be able to deduct the area percentage (Note: use area percentage calculated above) of the total cost. These indirect expenses would include such things as:
House Payment
Utilities
Telephone
Garbage Collection
Internet Connection (If other people are using the internet)
3. Direct Expenses
These are expenses that relate only to your business.
Supplies
Advertising
Business Account Bank Changes
These are expenses that relate only to your business.
Keeping Track of Expenses
To keep track of all your expenses. and you are comfortable working with a spreadsheet software, I would suggest purchasing a small business accounting package such as QuickBooks or Peachtree Accounting.
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Conclusion
To conclude, this definitely is not an exhaustive list of what you need to know. However, this will give you a beginning as to what you will have to be aware of when starting a home-based business. As your business grows, your CPA will be able to assist you and keep you on the straight and narrow to your success on the Internet.
About the Author
Vickie J Scanlon has a BBA degree in Administrative Management and Marketing. Previous owner of http://www.myaffiliateplace.biz; her content included 78 articles on ezinearticles.com and additional articles ebooks and commentaries on: articlesfactory.com, affiliatewebportal.com/, editorialtoday.com – streetdirectory.com/etoday
FAQ
1. What are the tax deductions available for affiliate marketers?
Affiliate marketers can deduct ordinary and necessary expenses related to their business, such as website hosting fees, advertising expenses, and office supplies. Additionally, they may be eligible to deduct home office expenses if they use a portion of their home exclusively for their business.
2. How do I report affiliate income on my tax return?
You can report affiliate income on your 1040, that is Schedule C (Form 1040) as self-employment income. Related expenses to your affiliate business can also be deducted on the same form.
3. Are there any tax implications for affiliate marketers who operate internationally?
Naturally, there are tax implications for affiliate marketers who operate internationally. They may need to pay taxes in the country where the income is earned, as well as in their home country. Additionally, local tax laws and regulations can come into play. We advise affiliate marketers to consult with one or more tax professionals to get a minimum baseline of requirements.