Direct Sellers and Taxes – How Does it Work?
Do you work at home as an independent distributor for a multi-level marketing company? If you do, you probably understood that sentence. Avon, Mary Kay, Amway, Tupperware and Herbalife are a few well-known companies who provide these opportunities.
Every year we hear from people who are surprised to learn that they still have to file a Schedule-C and are subject to direct sales taxes, even though they made only a small amount of money through these efforts. If you’ve considered becoming a direct seller for one of your favorite products–then tune in!
Let’s review the potential tax implications that come with the direct selling business.
How to Calculate Self-Employment Tax
The truth is that the tax laws apply to direct sellers in the same manner as other taxpayers. This generally means that the income and expenses of for-profit business activity are reported on a Schedule-C as self-employment income.
Self-employment income holds any net profit from the activity subject to the 15.3% self-employment tax, which functions in a similar manner as Social Security and Medicare taxes employees would have withheld from their wages.
Home Office Deductions
If you use your residence for business purposes related to your direct selling, you may be able to claim a home office deduction for the portion of the residence used. However, in order to qualify for the deduction, the area of the home must be exclusively used for the business.
For example, if you use a room of your house to solely store inventory, you can claim home office expenses for that room. On the other hand, if you host parties to sell products in your living room you will not be able to claim a deduction for the living room as it is used for personal reasons.
Transportation-Related Business Deductions
As a direct seller, you can deduct certain transportation expenses. Generally, the costs of travel between your home and the first and last business stops of the day are nondeductible commuting expenses. However, the costs of going between home and a temporary work location are deductible, should you have a regular work location away from home.
If your home qualifies as your principal place of business and you take the home office deduction, you may be able to deduct the daily travel costs between home and another work location in the same business, regardless of distance and whether the other location is permanent or temporary.
Note: Any personal transportation expenses remain nondeductible, even if your car advertises your business.
Additional Business-Related Deductions
One major tax pitfall direct sellers encounter has to do with sample and demonstration products. If you keep some of a company’s product(s) on-hand in order to sample them to potential customers, those costs may be deducted.
However, if you expect to sell the demonstrator kits or products rather than exhaust their value, they should be counted as inventory.
In either situation, if the products are used for personal reasons, the cost is not deductible. This applies even if you only occasionally show the product(s) to prospective customers.
Get the Facts
Becoming a direct seller serves as a good way to earn extra money and receive a discount on products you already enjoy using. If you decide to take the plunge, be sure to report all of your income and expenses properly to avoid any complications with the IRS as a result of your activities.
If you have any remaining questions before launching your new side hustle, chat with your local H&R Block tax pro to start on the right track.