Is Affiliate Marketing Income Taxable? Beginners Guide

Affiliate marketing is not just a side hustle anymore. It's a legitimate way of money money online and many smart marketers incorporate affiliate marketing with everything they do.

But, is affiliate marketing income taxable?

In this article, I will get into all the details about affiliate marketing tax implications and how they apply to you. I'll also give you some tips to ensure you don't pay too much in taxes.

Disclaimer: I am not an accountant. For specific tax advice, you should consult an accountant as laws and information can change.

Is Affiliate Marketing Income Taxable?

Yes, Affiliate marketing income is taxable. However, the amount you will pay depends on a few factors like where you live, whether you are a sole proprietor, or if you have registered a corporation.

When you get paid as an affiliate, it usually gets paid through Paypal, Payoneer, check, direct bank deposit, or even cryptocurrencies. There are other payment methods as well and that varies from country to country.

Despite the method of payment, taxes are NOT deducted from the commissions paid out to you.

The only deductions would be fees, such as PayPal fees and/or bank deposit fees. If you are depositing money into your account from one currency to another, you can expect additional fees too, but taxes are never deducted.

What About Sales Tax?

As an affiliate, you are not responsible for sales tax because technically you aren't the seller. You are the referrer of the product or service.

The buyer may or may not pay a sales tax, but this does not concern you at all, it's handled by the vendor.

How Much Do I Need to Declare?

If you are a US resident, you will need to declare taxable income if it's more than $600. Furthermore, you will also be required to make quarterly income tax payments. This is done by filling out a form T for quarterly taxes.

If you are a UK resident, you can make up to £1,000 in affiliate revenue without having to declare it to the HMRC. Anything beyond that you must declare.

If you are in Canada, you must declare all affiliate income regardless of how much you have earned in a calendar year.

How to Pay the Least Amount of Taxes Possible

When I first started doing affiliate marketing I declared my income as a sole proprietor. This means I was taxed on income I made just as if I were at my job.

When I started doing 6 figures, the self employment taxes was just too much so I set up a corporation, also known as an LLC.

When you claim income through a corporation, the tax rate is much less. For example, I pay 15% taxes on my income through my corporation. When I was acting as a sole proprietor I was taxed much higher, around 45-40%.

This money needs to stay in the corporation though and you effectively become an employee of the corporation. You would then "pay yourself" either biweekly or monthly, but you are still taxed on that income.

In the end, you're still paying less tax overall. The only drawback is that you need to live on a fixed income but the amount you withdraw is entirely up to you and your lifestyle.

Another drawback is that accounting fees for corporations are much higher than a personal tax return. You'll need to crunch some numbers to see if setting up a corporation is worth it or not and you can consult your accountant if you are unsure.

How to Set up a Corporation/LLC

To set up a corporation, you can either file one yourself or get a lawyer to do it for you. Getting a lawyer is the easy route because they handle everything for you. However, this comes with an expense.

There are agencies that can do this for you as well, but I haven't used them before so can't speak from experience here. I hired a lawyer to do this for me and it was so easy. It wasn't THAT expensive. If I remember correctly I paid around $600 to get it set up.

How to Track Your Affiliate Marketing Business Income and Taxes

I personally use QuickBooks Online which keeps all my income and expenses in one place.

I have a bookkeeper who cleans up my books and does the year-end reconciliations for me. Then, I simply give my accountant access to this for the year's end, and then am able to submit my return.

You could technically do all this manually, but unless you're good with numbers and understand taxes it will be a nightmare.

You would only really need software if you are setting up a corporation. When I was declaring my income as a sole proprietor, a spreadsheet was all I needed that keep track of my income and expenses. Once you go the LLC route, it becomes a lot more complicated and you will need the help of software to organize everything.

Affiliate Marketing Expenses and Deductions

As an affiliate marketer, you may incur various expenses that are essential to running your business. These can generally be classified as deductible business expenses, which include:

• Home office deduction: If you use a portion of your home exclusively for business purposes, you may be eligible for the home office deduction. This can cover mortgage interest, utilities, and even property taxes.
• Web hosting and domain fees: Costs associated with website hosting and domain registration are considered deductible business expenses.
• Software subscriptions: Any software used for your business, such as email marketing services, tracking software, or design tools, can be deducted as a business expense.
• Travel expenses: If you attend conferences or meetings related to your affiliate marketing business, the associated travel costs may be deductible.
• Advertising costs: Many affiliate marketers invest in advertising, such as pay-per-click campaigns, social media ads, and sponsored content. These expenses can be deducted as business costs.

Tax Tips For Affiliate Marketers

The last thing you want is to have to scramble for all your receipts, affiliate commission payout numbers, and so on when it comes to tax time.

Here are some tips to ease the burden when it comes to affiliate marketing taxes.

1. Create a filing system

Organize your receipts, invoices, and financial documents in a structured manner. These can be physical folders or digital folders on your computer.

2. Keep track of expenses

Record all your business-related expenses, such as advertising costs, website hosting fees, software subscriptions, and any travel expenses. Include the date, amount, and purpose of each expense.

3. Track your income

Maintain a record of all your affiliate marketing earnings. This includes commission payments, affiliate program income, and any other sources of income related to your business.

4. Reconcile bank statements

Regularly review your bank statements to ensure that all income and expenses are accurately recorded. Any discrepancies should be addressed and documented.

5. Separate bank account:

Consider opening a separate bank account specifically for your affiliate income and expenditures. This makes it easier to track your earnings and expenses and simplifies the process of monitoring and recording transactions.

You will need a separate bank account if you are starting a corporation, so keep that in mind.

6. Use accounting software:

Utilize accounting software or online tools to streamline and automate your record-keeping process. These tools can help you track income, and expenses, and generate reports for tax purposes.

As I mentioned before, this might only be necessary if you are starting a corporation, as I was able to handle this quite easily in a spreadsheet when I was acting as a sole proprietor.

7. Save For Taxes

Set aside a percentage of your affiliate income for taxes. This will prevent any surprises come tax time because believe me, it will happen!

8. Seek Expert Advice

Tax laws are complicated and change frequently. Consider hiring a tax professional, especially if your affiliate business has grown significantly. They can provide guidance on deductions, credits, and other tax-saving strategies.

By following these steps and maintaining accurate records, you should not have any problems when it comes to tax time. All business owners should be aware of this.

What Happens If You Don't File Taxes?

Failing to file taxes can have serious consequences. The Internal Revenue Service (IRS) has the authority to come after individuals who fail to file their taxes, imposing penalties and fines. These penalties can be substantial and increase over time.

One consequence of not filing taxes is the potential for additional fines. The IRS can impose a failure to file penalty, which can amount to 5% of the taxes owed for each month the return is late, up to a maximum of 25%. This penalty can add up quickly, significantly increasing the amount owed.

Furthermore, if the IRS determines that a taxpayer intentionally failed to file their taxes or falsified information on their tax return, it can result in legal consequences. Tax evasion is a crime that can lead to potential jail time. Engaging in such actions can have long-lasting repercussions on an individual's personal and professional life.

So don't ever evade paying tax on your affiliate income. It will bite you in the end and it's just not worth it.

Final Thoughts

So by now, you know the answer to the question - Is affiliate marketing income taxable?

Affiliate marketing can be a very lucrative business. I know this personally because I have been deeply involved with affiliate marketing for more than a decade now.

If you are an absolute beginner and want to learn affiliate marketing, consider an affiliate marketing course.

I buy all the courses I review and only recommend the best ones. 

If you have any questions, feel free to reach out to me!

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