Given the scope of this book and the initial simplicity of affiliate marketing, with or without a DBA, a sole proprietorship is good enough for most beginners. However, if your business does very well, you should consider upgrading to a more formal structure such as a corporation or limited liability company (LLC). We think these are great business structures, and one of them may be a great fit for you because of personal considerations, tax laws, liability concerns, etc.
To help beginners navigate the pros and cons of incorporation versus other forms of legal business structure, visit the Service Corps of Retired Executives (SCORE) at www.score.org for more help and information. Go to the Business Administration site.
Handling taxes on affiliate marketing commissions
In your first year or two of affiliate marketing, you will either have a net loss or a net profit (duh!), so you need to know how to handle it:
If you have a net loss (your total expenses exceed your total income), this loss is at least beneficial from a tax perspective because the loss reduces your taxable income, which in turn Your tax liability is reduced.
When you have a net profit (the whole point, right?), you should be aware of any taxes that are due. The following sections are the most obvious ones you should be prepared for.
Federal income tax
Well, someone has to pay for the loss! After all, when you make a net profit in your affiliate marketing business, it becomes a taxable event (oh … that event happens on April 15th). Fortunately, if you made a small profit, income tax won’t break you. In addition, other tax benefits kick in that help save, offset, or even eliminate potential federal income taxes.
For example, say you had a net profit of $2,800 in your business, it was your only income, and you are single. The standard deduction for 2019 is $12,200 (single filing) and $24,400 (married filing jointly). Because the standard deduction exceeds your business income, there is no federal income tax for 2019. But the net gain of $2,800 will likely be subject to self-employment tax (see next section).
Federal self-employment tax
Federal self-employment taxes are often waived by startup entrepreneurs, but they need to figure them out. Self-employment (SE) tax, also known as “Social Security and Medicare tax” or “FICA,” is a tax of up to 15.3 percent of your net taxable business income. This can be a heavy tax if you are not aware of it and are prepared to pay it.
For example, say you had a good year with your affiliate marketing business and you made a net profit of $10,000 (great job!) Federal income tax may not be that difficult because you have the standard deduction, personal exemptions, And there will likely be other deductions that can reduce taxable income, which will also reduce your potential federal income tax liability. (We cover tax deductions later in this chapter.) But what about federal self-employment taxes?
In the previous example ($10,000 net income), your SE tax would be 15.3 percent of $10,000, or a total of $1,530. Now, if you were willing, you pay quarterly estimated taxes to ease the financial pain. But what if you didn’t see it coming? That’s right – ouch!
Self-employment tax is reported on Schedule SE (Form 1040). When you see the profits come in, ask your tax preparer how to handle the tax liability — before the money is due.
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