Joining a multi-level marketing company as an independent distributor comes with many advantages. A flexible schedule, work from home abilities, and the main reason we care the most about, money.
But as we all know, anytime we make money Uncle Sam reaches out and expects his cut in the form of taxes. As much as I would love to tell you that independent income, such as what you’d make with MLMs, is earned tax-free, it just simply isn’t.
So what’s the deal with your profits from you MLM and taxes? It’s pretty simple to tell you the truth.
Profits, Income, Extra Cash – How It’s Taxed
When working with an MLM, you are considered an independent contractor for tax purposes. All of your commissions earned (your income) is reported to the IRS by the MLM company on IRS Form 1099.
Nicely, that income is taxed simply as regular income. It’s just added to your other income, like income from a regular 9-5. So if your W-2 from your regular job says you made $25,000 in 2020 and you made $10,000 from your MLM business then you will pay regular income tax on $35,000.
Now the not so nice part. You will also have to pay self-employment tax on your income if you made $400 or more as an independent contractor.
Self-Employement Tax – the quick and dirty
According to IRS.gov, self-employment tax refers only to Social Security and Medicare taxes. Just like an employer would take money out of your regular paycheck for social security and medicare. You just get to take it out yourself and hand it on over.
Self-employment tax is currently (as of 2020) sitting at a rate of 15.3%: 12.4% for social security on the first $137,700 you make and 2.9% for medicare on independent contractor income. It’s so much easier when you don’t see it coming out of your regular 9-5 paycheck, isn’t it?
One more pain point before we move onto other fun tax considerations.
Estimated Quarterly Payments
If you are making a good chunk of change working with an MLM, you may notice that you aren’t paying any taxes out of the money you earn…yet. And we shouldn’t be surprised that the IRS is going to want their money sooner rather than later.
If you are making enough to owe at least $1,000 in income tax on your independent contractor earnings, then the IRS is going to require that you make quarterly payments. And they will penalize you if you don’t. Thanks again IRS. If you are questioning whether you need to pay any estimated quarterly payments, it’s best to consult a CPA or accountant just to double check.
Now onto more pleasing topics. Like how to not pay as much in taxes!
Retirement Accounts – Our Money’s Secret Hideaway
If you are working full time as an independent contractor, you may begin to miss that employer sponsored 401k you had, especially come tax season. You used to be able to sock money away in a tax-sheltered retirement account to lower your annual tax bill, but now you work for yourself. What are you to do?
Meet the Individual 401k (i401k) and the Simplified Employee Pension Plan (SEP IRA).
Both accounts are tax-sheltered retirement plans designed for the self-employed. The big difference between the two is simply who gets to contribute to them. With an i401k, you can contribute to the plan as both the employer and the employee. With the SEP IRA, you can only contribute as the employer.
There are advantages and disadvantages to both, which we will get into later. But it’s important to remember that you do have options with it comes to replacing an employer sponsored retirement plan. And the contribution limits for both accounts is higher than the $19,500 you could contribute to your companies 401k plan – which is awesome for lowering the amount you owe in taxes each year.
Not working for yourself full time yet? You can still put some of that money away in a Traditional IRA or possibly a Roth IRA. The traditional may give you some tax deduction benefits, but it all depends on your entire financial income.
Business Expenses Deductions – Pay Taxes on Your Earnings, not Your Expenses
Business expense deductions are a bit trickier than we’d all like them to be. As much as we want to write off our mortgage or rent payments because we work from home, or our internet bill because we have an online business, we just don’t get to. If it’s too good to be true, right?
But you can deduct some expenses. Your general expenses should be deducted as a business expense, like a computer you use just for work, website hosting fees, cost of inventory, general overhead, and whatnot. But there the trickier items may take a bit of work to properly deduct.
Take a home office for example. You can deduct a home office from your taxes, provided that the room is used exclusively for your business. If your home office is also your guest room or a kitchen, you may run into some trouble.
When it comes to your phone or internet bills, you would look to deduct a proportion of your bills. So say you use your home internet connection 25% of the time for your business, you can deduct 25% of your bill as a business expense.
This same type of thinking can be applied to your car, any subscription services you may use for your business like Amazon Prime, or even depreciation expenses on items like your car, phone, computer, etc. Of course we’re now in the complicated realm of things that ensure CPAs have job security, so at this point I would suggest consulting a CPA if you want to take some of these deductions.
Taxes Need to be Paid – But Also Show that You are Successful!
Hey look! A positive spin on paying taxes! I deserve a trophy for that one.
Being an independent distributor with an MLM is part of what we would consider the simplest form of self-employment. It’s just like being an independent contractor for a company, a consultant, or the owner of a sole proprietorship.
Your income is simply treated as income on IRS Form 1040, expenses are treated as deductions, and you get the added perks of new retirement account possibilities and the option to deduct personal business expenses.
And seeing as how you are the boss, being self-employed and all, you can choose to care about deducting 20% of your monthly internet bill or you can decide that the effort is not worth the amount you’d save. It’s completely up to you.
Just remember to budget for the self-employment tax and any quarterly tax payments you may need to make. And as much as quarterly tax payments are a pain, just remember that if you have to pay them then you’re making at least $10,000 working for yourself. So give yourself a big pat on the back and go celebrate!