Tax tips for direct sellers

Working as an independent consultant or direct seller has become immensely popular in recent years. The IRS categorizes direct sellers as one of the following:

• An individual who sells consumer products at home or a place of business other than a permanent retail establishment
• An individual who sells consumer products on a deposit or commission basis
• An individual who delivers and/or distributes newspapers or shopping guides

Direct sellers have a few things in common. Their income is related to sales rather than to the number of hours worked. Services are provided between the seller and the person for whom the seller performs the services. The agreement ensures that sellers are not treated as employees for federal tax purposes.

Direct selling has been defined as the sale of a consumer product or service in a face-to-face manner away from a fixed retail outlet and these sales are conducted by self-employed independent contractors. Avon, Mary Kay, Amway, Tupperware, and Herbalife are amongst the best-known direct selling companies.

Tax Tips

Direct sales have now emerged as a popular niche since many direct sellers are independent dealers and are considered self-employed. This means that their taxes are not automatically withheld from their earnings. If you’re a direct seller, keep these tips in mind when you file your taxes:

Pay self-employment tax

As an independent consultant, if you earn more than $400 annually, the IRS expects you to pay your own tax. Self-employment income includes any net profit from the activity subject to the 15.3% self-employment tax, which functions similarly as Social Security and Medicare taxes employees would have withheld from their wages:

• 12.4% for Social Security
• 2.9% for Medicare

If you owe $1,000 or more in taxes when you file your tax return, then you should pay the estimated tax throughout the year. If you expect to owe less than $1,000 in taxes, you can pay it all at once when you file your annual tax return.

Report your business income

Direct sellers file for their taxes via Form 1040 Schedule C or C-EZ. The following represents the various forms of income a direct seller has to report:

• Sales
• Any incentives received for sales and the sales of others who work for the seller
• Prizes, awards, and gifts received from the selling business
• Products received for meeting sales quotas.

File your tax returns

Keep in mind that just because you file a tax return does not mean you’ll have to pay taxes. If your net business income (your revenue minus your expenses) is less than $400, you won’t owe any tax.

Know your deductions

Just like any other self-employed individual, direct sellers too can get their business expenses deducted. Business deductions are necessary to reduce your taxable income. Direct sellers can generally deduct ordinary and necessary business expenses, such as:

Advertising and marketing
As a direct seller, you can seek deductions for advertising or promoting your business. This includes:

• Fees paid for events
• Posters/flyers purchased
• Products purchased by you to demonstrate at events
• Testers or samples are given away to advertise your business
• Any form of online advertising (Google AdWords, Facebook ads, etc.)

Contract labor
At some point, you may require the help of someone, so you’ll likely hire someone on a contract basis. If they are working on their own time and are not considered an employee, you can write off their wages.

However, it’s important to remember that if you pay a contractor (an individual or LLC) more than $600 in any given year, you must provide them with a 1099-MISC by January 31st.

Office expenses & supplies
Office expenses include anything that assists you with running your business. Use of an app, software,, subscription to a website, creating a website/buying a domain name, or anything else used on your business is considered a deductible expense.

Supplies are the tools or equipment you purchase for your office such as:

• File folders
• Printer paper
• Thank you cards
• Printer ink or printing services
• Postage

Home office
The home office deduction is somewhat complicated but very beneficial. A home office can be considered a tax deduction as long as you use the office exclusively for your business. As a direct seller, you can apply for a home office deduction if you use some space at your home to store the products/inventory and supplies.

Startup
Start-up expenses (capital expenses) are not deductible unless the seller elects to deduct the expenses. If you are a direct sales consultant, you can deduct up to $5,000 in business startup costs and $5,000 in organizational costs. This includes starter kits, any fees you paid to become a consultant, costs incurred researching different companies, and training you paid for.

Cost of goods sold
Here, if you receive and hold any product for resale purposes you must track your inventory its cost. However, one must remember that you cannot write off the costs when you purchase the product, only when you sell it.

Business miles and vehicle expenses
To benefit from this particular tax deduction, you need to track your mileage. Any sort of distance that you cover with the use of your vehicle for your direct sales business, you can apply for the business mileage deduction.

Other Expenses
Certain expenses don’t fit easily into the general categories. Some things that fall under this category include:

• Cell phones if used exclusively for work
• Education expenses
• Licenses
• Postage
• Subscriptions to professional publications

Ready to file your taxes? We recommend filing with FlyFin. Tracking the direct sales tax deductions can be tricky however there are multiple methods to track your expenses, you can rely on bookkeeping software or use FlyFin, which serves as an expense manager to assist you with automating your tax payments annually as well as quarterly taxes.