Nowadays, multi-level marketing companies are everywhere. Whether MLM is your side hustle or a full-time gig, understanding the tax implications and deduction possibilities is critical to avoid tax audits, penalties and fines.
Defining Multi-level Marketing – MLM
The term multi-level marketing (MLM) references a direct sales strategy larger companies use to sell and promote their products and services. MLM companies reward their members for recruiting people into sales positions. Distributors and recruiters get paid percentages of the new recruit’s sales. New recruits become the distributor’s network or downline and are, in turn, encouraged to make sales to earn money.
Often, those who begin selling MLM products must invest financially in the business by purchasing a starter kit of goods and services at a discounted rate. They then promote the products through face-to-face engagements hosted by others or on social media. While virtually no products or services are off limits, the most common MLM organizations operate in the nutrition, clothing and beauty industries.
MLM organizations have a long history, gaining in popularity with the rise of social media. Online influencers changed how multi-level marketers reach their clients and prospects, now using the internet to widen their prospective reach.
Multi-level marketers can deduct some expenses from their taxes; however, this is not true for everything. Some misconceptions we often hear revolve around deducting personal expenses beyond what is required to operate your business. While deducting a home office exclusively dedicated to your MLM business is possible, deducting percentages of your entire mortgage will not.
The same holds with your vehicle, cell phone and internet. As with all self-employment components, you can deduct a portion of your expenses used to operate your business. For instance, if you spend two hours a day using your phone for business and six hours for personal purposes, only 25 percent of your phone expenses are business.
At Tax Time CPAs, we can consult with you on reasonable ways to keep track of your expenses, so doing your taxes each year isn’t a hassle. Accurate record-keeping, such as tracking your phone usage, postage, and mileage ensures accurate taxes.
Work as an Independent Contractor
Most multi-level marketing sales representatives fail to realize that they are independent contractors. The commission earned will be reported on a 1099 and are subject to self-employment tax. This self-employment tax is in addition to income tax. It is important to meet with us upon establishing your business so your business structure works. We will help you structure your MLM organization up front so you can take advantage of the tax benefits early on.
Plenty of clients make good money and see years of success in the MLM space. The clients who do best advise with us early, create a financial plan to grow and are properly structured initially. Are you ready to take your MLM to the next level? Give us a call. We are happy to help.