Affiliate Marketing US Tax Guide: Understanding the Basics

Affiliate marketing offers opportunities for people to make money through marketing the online sales of other products. It's a performance-based business model where individuals earn commissions by promoting products or services for other companies.

As more influencers and bloggers turn this into a full-fledged business, the intricacies of managing finances become paramount. Earning an income entails certain responsibilities, and it's essential for affiliate marketers to effectively manage the intricate aspects of taxable income. Understanding what counts as taxable income and where it comes from is important for affiliate marketers to stay financially clear and compliant. 

This article is a guide to help you understand affiliate marketing taxes. It covers everything from the basics to the specific tax considerations for this type of business. We will help affiliate marketers handle their taxes better by managing obligations, maximizing deductions, and distinguishing personal and business expenses.

Common Questions (and Answers) of Affiliate Marketers

Affiliate marketing is virtually no different from most self-employed pursuits. As a result, you pay your taxes and file your tax forms like any other business owner. 

‍

Naturally, this brings us to our first question.

Business Owner vs Self-Employed - Which is Better?

Many people mistakenly believe that creating an "official business" results in better tax benefits. But for most people in affiliate marketing, you don’t generally save money on your taxes by having a specific business type. You’ll find this common amongst multiple business types, from music businesses to twitch streamers. 

When Do Affiliate Marketers Start Paying Taxes?

Income earned through affiliate commissions is taxable and must be reported. The IRS requires that any individual earning over $400 from affiliate marketing within a tax year needs to file taxes. You can report the profit or loss from your affiliate marketing activity on Schedule C, Form 1040.

What Counts as Income for Affiliate Marketers?

Income sources for affiliate marketers aren't limited to direct sales commissions. Affiliate programs may offer additional compensation such as bonuses for meeting goals or payment for clicks, which are also considered taxable income. In other words, anything of value given to you from your affiliate partners is income.

Do Affiliate Marketers Pay Sales Tax?

Because affiliate marketers do not make direct sales, they do not pay sales tax. Affiliate marketers, however, are only obligated to pay the standard tax rates. For most people earning affiliate income, this is the standard self-employment tax rate of 15.3%. 

‍

This does not include what you might need to pay in state or local taxes. So, it’s generally recommended to save anywhere from 25 to 30% of your income to account for both sides.

Do Affiliate Marketers Need To Pay Taxes Between Multiple States?

While affiliate marketing specialists work with companies across multiple states, they do not need to pay tax in these states. This is because affiliate marketers do not technically sell products or services themselves. Rather, they promote and market them on behalf of the companies they work with. 

Do You Need a Tax ID for Affiliate Marketing?

No, you do not need a Tax ID, also known as an Employer Identification Number (EIN), to become an affiliate marketer. Instead, your social security number (SSN) acts as your tax ID number if you’re self-employed. 

‍

However, if you go through business formation, you will need an EIN in some cases. But you don’t need to form a business entity to start affiliate marketing. 

Do Nexus Tax Apply to Affiliate Marketers?

Nexus taxes apply to retail businesses making above certain thresholds in some states. For example, if you live in Texas and make over $100 thousand in retail sales in Colorado, Colorado would get a chunk of those sales. Because you don’t make any actual sales, nexus laws do not apply. This is a common misconception for some affiliate marketers. 

Tax Benefits and Deductions for Affiliate Marketers

The silver lining in tax preparation is the opportunity to reduce tax liabilities through permissible deductions and tax benefits. For affiliate marketers, the IRS allows deductions for expenses related to their business. These can include advertising costs, software purchases, web hosting fees, travel expenses, and home office set-up costs.

IRS Publication 535 sheds light on the kinds of expenses that qualify and how they should be reported on tax filings. Additionally, affiliate marketers might be eligible for tax credits, such as the Child Tax Credit (if they have kids) or the American Opportunity Tax Credit — all of which can considerably lower the overall tax burden.

Below, you will find detailed potential deductions specific to your affiliate business.

Advertising and Marketing Costs

Advertising and marketing are the lifeblood of affiliate marketing and, therefore, the costs associated with these activities are generally tax-deductible. This includes outlays on paid ads through Google AdWords, Facebook, Instagram, and other social media platforms. 

In addition, money spent on creating banners, launching email marketing campaigns, and any other promotional activity can be deducted. The IRS views these expenses as directly contributing to the generation of sales and, consequently, commissions for the affiliate marketer. To claim deductions, make sure to have clear and easily accessible records of the business-related expenses. These records must demonstrate that the expenses were incurred in the course of business.

Software Subscriptions and Tools

Software subscriptions and online tools play a critical role for affiliate marketers. These utilities could include website hosting services, graphic design software, and tools that aid market research. Such costs are perceived as 'ordinary and necessary' for the operation and success of an affiliate marketing business. As a result, expenses for software subscriptions and digital tools can be deducted from gross income. 

Travel Expenses

You can deduct travel expenses related to business, such as trips to attend conferences or meetings. Only the expenses related to business are deductible, including flights, hotel accommodations, and a portion of meal expenses while traveling. You cannot deduct extravagant expenses and personal costs from your travels. It is important to separate and carefully record all business-related expenses.

Other Deductible Business Expenses

Apart from direct marketing and promotional costs, affiliate marketers can deduct a wide range of other business-related expenses. 

• You can deduct home office expenses if part of your home is used exclusively for business, including a portion of utilities.
•  Equipment purchases such as cameras, computers, and furniture required for content creation and office setup are similarly deductible.

All these expenses contribute to reducing the taxable income for affiliate marketers, provided they are strictly business-related and are accurately reflected in the affiliate marketer's tax filings. Personal expenses remain nondeductible, but the broad scope of business expenses that qualify underscores the breadth of potential deductions available to affiliate marketers.

‍