In this post, I will share the top 21 tax deductions for network marketers. After we cover the basic tax deductions, I will share some of my best tax tips for network marketers.
As a network marketer, you are eligible for great tax deductions, just like a traditional business owner, assuming you are treating your business like a real business and you have the INTENT to make a profit.
The IRS has clear rules about the difference between a hobby and a business. In order to be eligible for tax deductions, you must ensure the IRS considers your business a business (by your intent, game-plan and efforts). I suggest you go online and read those rules, or sit down with your licensed CPA to find out more.
The bottom line is that you don’t get to enjoy the tax deductions of having a business IF you aren’t treating your network marketing business like a real business.
What I want to do in this post is share some of the most common tax deductions for network marketers in the United States (as of 2019). As a quick disclaimer, I am NOT a CPA, bookkeeper, or tax professional. I’m just sharing some of my first hand knowledge of doing my own small business taxes for more than a decade, and some things I found on the IRS website.
The deductions listed below are subject to change at any time, so make sure you visit the IRS website frequently or find out from your CPA. Ultimately, it’s your responsibility to know what you can and can’t deduct on your taxes. This article is for educational purposes only and is NOT financial or tax advice.
All of these “deductions” I’m going to share with you today are by no means exclusive to network marketing. They are available to anyone who owns any type of business. In fact, all of these deductions are right off the official IRS website and the Schedule C Form for your tax return. I am simply sharing that information with you.
Top 21 Tax Deductions for Network Marketers
Here are the common categories on a Schedule C:
# 1: Advertising
This could include business cards, buying leads, flyers, participation in an advertising COOP with your upline, sample products, newspaper ads, postcards, pay-per-click ads, or any type of online or offline advertising that you might do to generate leads, find prospects or make more sales.
Advertising is one of the largest expenses that you will incur as a multi-level marketer. Advertising can include magazine, newspaper, Internet and other ads you use to market your business to others. Make sure you keep track of all advertising expenses during the year. Keep all receipts from vendors in an envelope. That way you have easy access to them when you check them against your records.
# 2: Car and Truck Expenses
You can do a standard mileage deduction for your vehicle or you can do an actual expense deduction (the IRS site explains the differences). I highly suggest you get a mileage log and track your business, personal and commute miles each day.
Log it into your mileage log. The IRS requires that you document your mileage. You can buy a mileage log at Office Max or on Amazon for less than $3.
In addition, keep your receipts for oil changes, repairs, car payments, insurance, registration fees, gasoline purchases, etc. At the end of the year you can decide between the standard mileage deduction or actual expenses, whichever is larger.
In addition, you can deduct tolls and parking, when they are business related. Some states (not all) even let you deduct part of your vehicle registration costs.
If your car is used for your MLM business, your miles can be a tax deduction expense. There are two methods to deduct car expenses, (1) using mileage allowance and (2) using actual costs/receipts. The majority of independent contractors use the standard mileage rate to deduct their car expenses from their taxes, method one from above. According to the IRS, the 2017 standard mileage rate for the cost of operating your car for business use is 53.5 cents per mile. If this method is used, you cannot deduct your actual car expenses, including: depreciation, maintenance and repairs, gas, oil, insurance, or vehicle registration fees. If you drive your car for both personal and business, it is recommended that you utilize a mileage log to track the actual mileage used for business versus personal.
# 3: Commissions and Fees
This category might include fees you paid to set up a booth at a trade show, fees for your company’s replicated website, renewal fees with your company, etc. This would also include any PayPal fees you paid from money sent to you electronically.
# 4: Contract Labor
This category is for any independent contractor that you hire to help you with your business. For example, maybe you hired someone to write some blog posts for you, to create a custom eBook cover, or to do a freelance project. This is the category those tasks would fall in.
Whenever you pay a person more than $600 in one calendar year, you must provide them (and the IRS) a 1099-MISC form. This is also what your MLM Company does for you (if you earn more than $600).
This category is for any independent contractor that you hire to help you with your business. For example, maybe you want to hire someone to write a blog for you, create a book cover, perform some SEO for your business, or put together an advertising campaign. This is the category that work would fall in. If you pay them more than $600 a year, then you must provide them with a 1099-MISC for reporting purposes.
Source: Calvenn Starre
# 5: Home Office Deduction
This is a legal tax deduction, although a lot of folks are scared to use it! Basically, if you have a home office space that is used exclusively for your network marketing business, you can take a home office deduction.
For example, if that home office space was 5% of the total space in your house, you could deduct 5% of your home expenses, such as utilities, gas, water, sewer, etc. You definitely want to take some time and educate yourself on this deduction. The IRS website does a great job explaining how it works.
Note that for those in their first year of operation you will need to prorate all home office expenses for the part of the year. Only claim from the month you started.
# 6: Interest
Most network marketers won’t use this expense, but examples could include if you have a credit card that is used EXCLUSIVELY for your MLM Business or if you took out a business loan for your MLM Business (not recommended).
In either case, it’s just the interest that would be deductible. If you have a credit card that is used for both personal and business expenses (not recommended), you could only deduct a percentage of the interest, based off business purchases.
If you took any type of loan to get your business “fired up,” or if you used a business credit card to purchase any supplies or inventory, you can take a deduction on the interest you have to pay.
This is an often overlooked deduction. Don’t let it slip by. It may not amount to a lot, but every bit helps reduce your tax liability.
# 7: Inventory/Cost of Goods Sold
This one only applies if you keep an inventory. Not all network marketers have an inventory. If you keep an inventory, you will have to determine your cost of goods sold.
This is basically where you take your sales, minus your inventory purchases, and combine it with your remaining inventory on hand at the end of the year. Ultimately, you need to do an inventory on January 1st and one on December 31st, so you can make these calculations.
Do a quick internet search on how to determine “cost of goods sold” and you will have a better understanding of this tax deduction for network marketers.
Business owners can deduct the cost of goods sold from your gross receipts on your Schedule C. To qualify for this deduction, you need to track and value the inventory you have on hand at the beginning and end of each tax year.
# 8: Legal and Professional Services
Whenever you hire a lawyer, accountant, bookkeeper, or any other professional service (for business purposes), the fees would be placed in this category.
No matter how good you are at running your business, trying to do everything on your own is a recipe for burnout. Fortunately, the money you spend on outside experts to offer business advice as well as subcontractors to help with your workload can all be added to your home business tax deductions.
# 9: Meals and Entertainment
This category is a “touchy” one. You can’t deduct your own meals, but if you take a client out to lunch and pay for their meal (and yours) you can deduct 50% of the cost of the meal on your taxes, if the meal or entertainment was business related.
You can also deduct any food you buy exclusively for home parties to promote your business. Some food is 100% deductible, but most meals are only 50% deductible.
Educate yourself on the difference between the two. Whenever you get a receipt, make sure you write down what the food was for, who you were with, and what the business purpose was.
Network marketing is a social business. You have to eat and you may as well have some fun and do it while you are recruiting or selling. This is one of those expenses the IRS keeps whittling away at, however. Your deductions are now limited to 50 percent of your meal and entertainment costs.
# 10: Office Expense
This would include any office supplies that are used for your business, such as ink, paper, toner, pens, staples, paper clips, folders, etc. Please note that if the supplies are not 100% for business use, you can only deduct the percentage of the cost that is used for business purposes.
For instance, if you bought an ink cartridge and it is used 50% of the time for business and 50% personal, you could only deduct 50% of the cost.
Office supplies are another expense you can fully deduct for multi-level marketing. Office supplies can include legal pads, pens, pencils, staplers, staples, paper clips, file folders, index cards and many other items. Certain computer software programs you use for your business are also deductible. Typically, you can deduct any expense that is necessary for conducting business.
# 11: Supplies
Here’s what I found on the IRS website about supplies.
In general, the cost of materials and supplies used in the course of a trade or business may be deducted as a business expense in the tax year they are used. In addition, the cost of incidental materials and supplies that are kept on hand may be deducted in the tax year of purchase provided that:
- No records are maintained indicating when supplies are actually used,
- No inventory is taken of the amount of supplies on hand at the beginning and end of the year, and
- This method does not distort income.
Taxpayers should be careful to avoid deducting expenses as supplies when they are capital assets. For example, if the useful life of an item is significantly greater than one year it must be depreciated.
Supplies used directly or indirectly in manufacturing goods are part of the cost of goods sold.
Source: IRS Website
# 12: Taxes and Licenses
This category is for any business license you have to purchase to operate a business out of your home. Each county is different, so make sure you find out if this is a requirement where you live.
# 13: Travel
This category is for any type of travel expenses to meetings, regional rallies, your company convention, training events, etc. that are OVERNIGHT and away from your home.
They MUST be business related. Once again, visit the IRS website or talk to your CPA to learn the details. This is one area a lot of people mess up with.
If you take a trip and it is a combination of personal and business use, which most trips are, then you can only deduct the business percentage of the trip.
Nearly any travel you do in relation to growing your business is considered tax deductible. While trade shows and international trips seem pretty obvious, you can also claim the miles you drive to meet clients and for other business purposes.
In order to do this, you need to track these miles and be able to produce records if requested by the tax authorities. The rates at which mileage is reimbursed change each year, so make sure you use the correct rates.
# 14: Phone & Internet Expense
This might include your cell phone, land-line or internet bill used exclusively for your business. If it isn’t used exclusively for business, it must be pro-rated.
In addition to writing off the cost of your phone and computer hardware, you can also write off your service for these devices. Smartphones and in-home (or in-office) WiFi and/or internet can dramatically increase productivity and are critical for social networking and other marketing-related strategies. And don’t underestimate their deduction power: Recent rulings allow business owners to write off 100 percent of their mobile phone service as long as they have at least one dedicated home phone line.
# 15: Miscellaneous Expense
This would be any other type of legitimate business expense that does not fall into one of the categories mentioned above (or below).
There are several miscellaneous tax breaks that may or may not be eligible for deductions where you live. As a self-employed person, you may be eligible for a deduction if you pay for your own health insurance. Additionally, if your spouse works for you and dependents are listed on the policy, their premiums are deductible also.
Not So Common Tax Deductions for Network Marketers
Here are some other tax deductions for network marketers that are on the Schedule C that you CAN deduct, although they aren’t very common for network marketers.
# 16: Depletion
This is on the Schedule C, but I’ve never used it and know nothing about it.
# 17: Depreciation and Section 179
This is when you purchase an expensive item, such as a printer or laptop computer, and plan on using it in your business more than one year. The IRS won’t let you deduct the whole thing in one year (in most cases), so you are required to depreciate it over a certain amount of years.
You may deduct the cost of business equipment, furniture and fixtures beginning with the year that you purchase the equipment and use in your business. Once this purchase has been made, you may deduct the cost of this equipment by electing to use the appropriate combination of depreciation and Section 179 asset expensing. Note: If any of these items are mixed-use, their cost must be pro-rated between personal and business use prior to calculating the applicable business tax deduction.
# 18: Employee Benefit Programs
This only applies if you have employees, which hopefully you don’t have!
Deducting the costs of providing employee benefits, such as health plans and retirement savings plans. Most employee benefit costs are deductible but there are some restrictions.
Source: the balance
# 19: Insurance
This would be any business specific insurance that you bought for your MLM Business, such as liability insurance or an umbrella policy.
# 20: Pension and Profit Sharing
This would be if you have created a pension program or profit-sharing program FORMALLY for your business (employees or yourself).
# 21: Wages
This would be in case you had any employees on payroll. I suggest you look into the laws about employing your spouse and/or children. It can definitely be worthwhile and be a huge tax savings.
There are some minor tax advantages to paying your children- for example, you can pay your child $6,300 in wages, and since the standard deduction for 2016 is $6,300 the child will not have any taxable income. This will not affect your ability to take the tax exemption for your child. If you pay yourself this income through a shareholder distribution and you are in the 15% tax bracket, you will unnecessarily pay about $885 in income taxes. Your kids are going to take your money anyways- might as well make it tax-advantaged.
Source: WCG Inc.
Top 7 Tax Tips for Network Marketers
What I want to do in the paragraphs below is share seven of my best tax tips for network marketers. These are “things” I’ve learned along the way that really helped me out.
# 1) Hire a CPA
Even if you plan on preparing and filing your own taxes, it makes sense to hire a CPA for one or two hours. Sit down with them and ask them all of your tax questions. Make a list of things you think you can deduct and run each category by them.
Also, ask them if you are missing any common tax deductions you should know about. Ask them what tips and suggestions they can offer you to help you get organized and simplify things.
Furthermore, realize that the tax law in the United States is very complex and changes each year. If you were to sit down and read the current tax code, you probably couldn’t do it in one lifetime.
This is why I suggest you have a CPA advisor. They have continuing education to keep on top of the tax law changes and know what is going on and how it affects their clients.
The most effective strategy to ensure that your taxes are filed correctly, and on-time is to hire an experienced accounting team to handle the work. You should be spending your time on other business activities, instead of trying to decipher tax law and crunch the numbers. Outsourcing these services can be a powerful way to boost your long-term results. The key is to make sure that you hire an experienced team who understands the most effective strategies to use for your business.
# 2) Keep Every Receipt
Every receipt that you lose or misplace is money wasted. Make it a game to keep EVERY receipt you can. Don’t worry about whether you can deduct it or not. Just get in the habit of saving all of your receipts. You can sort them out once a month.
If you want to get the best tax refund every year, some good but simple record keeping is the trick. Keep every receipt for every payment you make on work expenses – even if you’re not sure if you can claim them.
Source: etax accountants
# 3) Get Organized
Designate a drawer in your desk for your receipts. Or, use an empty shoe box. Just do something. Every day, get in the habit of putting all of your receipts in this one designated place.
At the end of each month, you can take out your receipts, determine what is a legal tax deduction, organize them by category and add up your expenses.
All receipts such as sales, procurement or purchases should be kept in an organized format that comprises of categorization. Whether the transactions are done electronically or not, it is also vital to keep the receipt in an electronic format. Make scanned copies of receipts and date them accordingly, using appropriate folders to aid future references. Keeping receipts helps your accountant to calculate expenses more easily by picking up files or documents where receipts are stored. Make printouts of electronic transactions to serve as an alternative document in case of electronic failures.
# 4) Keep an Updated Profit and Loss Statement
Every legitimate business needs an updated monthly Profit and Loss Statement, known as a P&L. What you do is add up all of your income and expenses for your business each month, which will determine whether you made money or lost money.
What I do is use a simple MS Excel Spreadsheet. I take my totals for each category of expenses, update my spreadsheet, and know how I did financially for the month. Because I do this once a month, I know where my business stands financially at all times.
Every business needs to prepare and review its profit and loss statement periodically – at least every quarter. Reviewing the profit and loss statement helps the business make decisions and to prepare the business tax return. Your business tax return will use the information from the P&L as the basis for the calculation of net income, to determine the income tax your business must pay.
Source: the balance
# 5) Take Your Home Office Deduction
This is a big one. Whether you are a renter or a home owner, you can take advantage of the home office deduction. Visit the IRS website to see the requirements, and if you are eligible.
The beauty of the home office deduction is that it can save you thousands of dollars in taxes each year. If you are eligible, you can deduct a portion of your house hold expenses, such as your rent, utilities, lawn care, housekeeping, etc.
The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room in your home for a full-time business and you work in it ten hours a day, seven days a week. Let your children use the office to do their homework, though, and you violate the exclusive-use requirement and forfeit the chance for home-office deductions.
# 6) Pay Your Quarterly Taxes
If your MLM Business is profitable, and I hope it is, you should pay your quarterly taxes. Put aside a percentage of each commission check you receive and deposit it into your savings account. Every 90-days, pay your quarterly taxes. This keeps you from getting a big tax bill at the end of the year, and not having money to pay for it. I would make it a goal to set aside at least 30% of your earnings.
If you have trouble saving for your quarterly estimated tax payments, set aside funds each month instead. Treat it like any other monthly operating expense, that way it won’t seem like such a chunk when payment comes due.
# 7) Be Smart with Your Money
This one should be common sense, but I realize that most people have never received even one hour of instruction on handling their money. Do NOT spend all of your MLM Income. Be smart with your money. What does this mean? It means you should use your MLM Income to:
- Pay off your unsecured debt
- Fund your retirement accounts
- Build up your emergency fund
- Invest in other assets
- Reinvent is your business
- Save for your children’s college education
- Put aside money for taxes
- And much more!
You don’t need that new car or vacation as bad as you think you do. Be smart with your money. You will be glad you did!
Make it a goal to be debt free and have at least 12-months worth of living expenses in your emergency fund before you upgrade your lifestyle.
I believe that every network marketer has the responsibility to educate themselves about small business taxes, and to learn what they legally can and cannot deduct. It’s your responsibility to pay what you owe in taxes, but not a dollar more, nor a dollar less.
If this is your first time owning a business, I highly suggest you sit down with a CPA or bookkeeper and have them help you get things set up. You should also purchase a few books on small business taxes, or attend a tax workshop or seminar. These things are also all tax-deductible.
Once you learn the basics about what you can and can’t legally deduct, what reports you need to prepare, and what receipts you need to keep record of, your life will be a lot simpler.
What are your thoughts? What are some of your favorite tax deductions for network marketers? What are some of your favorite tax tips for network marketers? Leave a comment below to let me know what you think. I look forward to hearing from you.
DISCLAIMER: This article is for educational purposes only. Please consult with a trusted CPA or licensed tax professional before deciding what you can or cannot deduct. Also, know that tax laws do change from time to time.