An affiliate marketing business can be very lucrative. Of course, this means the IRS is going to want you to pay taxes on your affiliate marketing income. Here’s what you need to do and how you can save money.
What’s the tax status of affiliate marketers?
Affiliate marketers are usually independent contractors. That means they operate and pay taxes like business owners.
Most marketers will work through multiple affiliate programs. This means you might get multiple 1099s from different brands or advertising networks.
You might get either a 1099-NEC or 1099-K. A 1099-NEC is for when a company pays you directly. A 1099-K is for when a company pays you through a third-party payment network and the payment network is responsible for sending your tax form. PayPal is a common example where you get a 1099-K from PayPal instead of a 1099-NEC from the affiliate platform.
If you also use AdSense, check out this guide.
What about state income taxes?
You’ll generally pay state income taxes based on where you live.
You may have heard of some advertisers dropping affiliates in certain states. This is related to their sales tax rules not your income tax status.
What income do affiliate marketers pay taxes on?
Your business income is your total income from all sources however they pay you. Your taxable income is your business income minus your business deductions and personal deductions.
What income do affiliate marketers have to declare?
You need to declare all income from all sources. This might include:
- A referral fee from a brand
- Pay-per-impression earnings
- Pay-per-click earnings
- Cryptocurrency compensation
What taxes do affiliate marketers pay?
Affiliate marketers pay income taxes according to their tax bracket. As an independent contractor, self-employment taxes also apply to your earnings from affiliate marketing.
The typical rate for self-employment taxes is 15.3%. Self-employment taxes include 12.4% for Social Security and 2.9% for Medicare.
You can earn Social Security credits on the income you pay Social Security tax on.
What if you don’t get a 1099?
You still need to report income even if you don’t get a 1099.
If you earn less than $600 from a company, they don’t have to issue a 1099. You still need to include that income on your personal tax return.
If you don’t get a 1099 that you’re expecting at tax time, you can just report the amount of income you received from that company.
What tax deductions can you take as an affiliate marketer?
You have the right to take a tax deduction for your business expenses. Exactly what deductions you can take depends on exactly what you do.
Home Office Deduction
If you work out of a home office, you may be eligible for the home office deduction. There are two primary requirements.
- Regular and exclusive use. Regular means that you’re regularly using it for business. Exclusive means that you don’t do anything else in your office — not even letting your kids play on your computer at night.
- Principal place of business. Principal place of business does not necessarily mean only place of business. For example, you might have a separate production studio but use your home office for client meetings and administrative work. As long as you use your home office substantially and regularly, it can qualify.
There are two ways to take the home office deduction.
- Standard option. You can deduct your actual expenses based on what percentage of your home you use for an office (by square footage). Your expenses can include mortgage interest or rent, utility bills, property taxes, maintenance, and depreciation. If you claim something that is also a personal itemized deduction, such as mortgage interest, you have to reduce your itemized deduction by the same amount (no double-dipping). If you claim depreciation, you have to pay taxes on the total depreciation you claimed over the years when you sell your home.
- Simplified option. You can deduct $5 per square foot up to 300 square feet. You don’t have to calculate depreciation or pay taxes on the depreciation you deducted when you sell your home. You can deduct your mortgage interest and property taxes as personal itemized deductions.
If you rent or buy an office, that expense is generally deductible. Monthly expenses like rent and utilities can generally be deducted when they happen.
If you buy a building, you’ll probably need to have an accountant calculate depreciation. Depreciation means spreading the cost over the life of the building. For example, depreciation of $300,000 over 30 years means deducting $10,000 per year.
Digital Products and Services
You may need to pay for subscriptions or software to do your job. For example, you might pay for web hosting or an SEO tool. These are generally deductible in full.
Physical Goods and Equipment
You might need to buy things like a camera for your content creation. You might also buy items to review.
You can generally deduct these items in full. If you spend more than $1,000,000 per year, ask your tax expert about depreciation.
One thing to watch out for is trying to take deductions for personal items even if you do use them in business. For example, you want a new grill, so you buy a grill and review it. You can technically take prorated deductions for items you use for personal and business use, but in this example, your business use is a few hours out of an item you’ll keep for years.
Trying to game the system is what gets people audited and makes the IRS take a microscope to all of their deductions.
Other Deductions for Businesses
There are a few other deductions affiliate marketers may be eligible for. These deductions are separate line items on your personal income tax return and don’t go in with your business deductions.
Qualified Business Income Deduction
The QBI deduction allows you to reduce your taxable income by 20%. It applies only to income taxes, not self-employment taxes.
As an affiliate marketer, you need to pay close attention to whether you’re a specified service business as being one can reduce your QBI deduction.
- If your primary business is receiving compensation for endorsements or using your personal image to promote products, you’re likely a specified service business.
- If the activity of affiliate marketing is merely a source of advertising revenue on a website that provides other information or services, you may not be a specified service business.
If your income is below the following levels, you qualify for the full deduction. If your income is slightly above the following levels, you receive a smaller deduction. If your income is well above the following levels, you received no deduction.
|Single and Married Filing Separately||$170,050||$182,100|
|Married Filing Jointly and Qualifying Widower||$340,100||$364,200|
|Head of Household||$170,050||$182,100|
You can deduct your health insurance premiums if you are not eligible for a plan through an employer or your spouse’s employer. If you receive the premium tax credit, you can only deduct the portion of the premiums you pay for out of pocket.
One Half of Self-Employment Tax
You will receive an automatic deduction on your income taxes for one-half of your self-employment taxes. This compensates for the fact that employees only pay for half of these taxes, and their employer pays for the rest.
Your business profit as an influencer counts as earned income. You can contribute to an IRA or Roth IRA based on this income. You can also open a self-employed retirement account such as a SEP IRA or solo 401(k) if you want to contribute more to get a larger deduction.
Proving Your Deductions
No matter what deductions you’re claiming, you need to keep proof. Bank statements or credit card statements generally aren’t enough.
You need records of:
- What you bought
- When you bought it
- How much you paid
- The business purpose of the purchase, especially if it is something that could also be a personal expense
How do affiliate marketers pay and file taxes?
Most affiliate marketers are sole proprietorships who file a Schedule C with their personal tax return. You do not need to file a separate tax return unless you are a partnership, corporation, or LLC taxed as a corporation.
While the tax filing deadline is typically April 15th, you’ll usually need to make estimated tax payments throughout the year.
If you work in a state or city with income taxes, you may also have to file a state or city tax return.
Affiliate Marketer Tax Calendar
|Action Needed||2022 Tax Year||2023 Tax Year|
|First Quarter Estimated Tax Payment Due||April 18, 2022||April 18, 2023|
|Second Quarter Estimated Tax Payment Due||June 15, 2022||June 15, 2023|
|Third Quarter Estimated Tax Payment Due||September 15, 2022||September 15, 2023|
|Fourth Quarter Estimated Tax Payment Due||January 17, 2023*||January 16, 2024*|
|Receive Your 1099||No later than January 31, 2023||No later than January 31, 2024|
|File Your Tax Return||Tuesday April 18, 2023 (15th is a Saturday; Monday is Washington, D.C., Emancipation Day)||April 15, 2024|
|Extended Filing Deadline||Monday October 16, 2023 (15th is a Sunday)||October 15, 2024|
Estimated Tax Payment Requirements
How much you need to pay in estimated taxes depends on your income.
|Based on Current Year Tax Return||Based on Prior Year Tax Return|
|AGI up to $150,000 ($75,000 if married filing separate)||90% of current year taxes||100% of prior year taxes|
|AGI over $150,000 ($75,000 if married filing separate)||100% of current year taxes||110% of prior year taxes|
How much should you set aside for quarterly taxes?
Setting aside 30% of your business profits is a pretty good ballpark estimate for most people. If you use QuickBooks Self-Employed for your accounting, it will calculate your estimated tax payments for you.
If being an affiliate marketer is your side hustle instead of your main job, you can also increase your tax withholding at your main job in place of making estimated tax payments.
How do you make estimated tax payments?
It’s easiest to go on the IRS website once per quarter and pay by direct debit or credit card. You can schedule your quarterly payments in advance, but it takes more time setting up than logging on four times per year to make a single payment.
Frequently Asked Questions About Affiliate Marketing Taxes
Here are some frequently asked questions about affiliate marketing taxes.
Should you form an LLC for affiliate marketing?
Forming an LLC generally won’t help you for tax purposes. You can deduct your business expenses whether or not you have an LLC. The tax rate for an LLC is the same as for a sole proprietor.
Can an S-corporation reduce your tax liability?
The main use of forming an S-corporation for tax purposes is to convert some of your income into dividend income. If you take income as dividends, you pay income taxes but not self-employment taxes.
The catch is that you still have to take a reasonable salary as an affiliate marketing business owner. You can’t just say all of your income is in dividends to avoid self-employment taxes. When you avoid self-employment taxes, you’re also potentially reducing your future Social Security earnings.
Once you add in the costs of forming an S-corporation plus the annual fees you have to pay to the state, S-corporations can often be more trouble than they’re worth.
Can you work in any state as an affiliate marketer?
Some states are trying to say a company has to pay sales tax if they have an affiliate marketer who lives in that state. Therefore, some companies or affiliate marketing platforms don’t allow affiliate marketers who live in certain states. Check with your programs for details.
What if you work abroad?
Affiliate marketing is a popular job for digital nomads. If you work abroad as a U.S. citizen, you generally still need to pay U.S. income taxes. However, if you’re a full time resident of another country and subject to their tax laws, you may be eligible for the Foreign Earned Income Exclusion or the Foreign Tax Credit.