Why Affiliate Marketers Should Consider Incorporating And How it Affects Your Taxes
First of all let’s get the disclaimer out of the way right now: WE ARE NOT LAWYERS, WE ARE NOT FINANCIAL ADVISORS > SO USE THIS LESSON AS NOTHING BUT A GUIDE – AND CONSULT WITH A PRO!
So your affiliate earnings are starting to rack up and now you need to ask yourself how to pay taxes as an affiliate marketer and should I be a business? Unless you are a person that lives in a country with no income tax (lucky you) then you will likely have to pay taxes on all your income generated through your online activities.
The decision to go into a business as opposed to remain an individual is usually based on the issue of taxes and liability.
So this is going to depend on a few things mainly what state, province you live in and what country. Every country and state/province has their own laws and tax implications. There are also other things to consider too like are you married? and can your spouse be an employee for you? Do you own a piece of property and work from this location? There is no way this lesson can cover every scenario.
The idea here is that you need to get tax information for affiliate marketing and understand your own income tax laws. Most of the decision on whether you incorporate or just work as an individual will be related to the tax issue. For example, in Canada if you incorporate your income tax on corporate profits is around 17% but if you claim profit income as an individual you pay over 30-40% in personal income tax! So in many cases a corporation is the way to go since taxes are less, and the corporation can own assets and property. Also it is easier to manage the business expenses and claim them against the total net income of your corporation.
In most cases if you are earning a large amount of money it is likely best to do so under a business. All it means is now you will be submitting your taxes as a business in addition to your own personal income taxes. In many cases this also protects your personal assets and liability from the activities of the business. Again you will need to consult with a lawyer since every scenario is different, as well as the applicable laws.
There are several different business types to consider as an affiliate, or online marketer. For example, Limited Liability Company (LLC), Doing Business As (DBA), Corporation, or Partnerships. You can learn about all the common business types at LegalZoom.
It is fair to say that most affiliate marketers won’t create a real business structure when they are just getting started. However it is something that really needs to be considered right from the start.
Of course why would you go through all the hassle if you are simply going to test out affiliate marketing by building one website using nothing but free resources in your spare time? In this case you would likely not miss out on too many savings, but as you begin earning more and more money or even losing money, you will need to consider the business approach.
Here are a few great reasons to start a real affiliate marketing business:
Lower Tax Rates for Corporations
In many countries the corporate tax rate is much lower than the personal tax rates.
Tax Write Offs For Your Affiliate Marketing Tools and Education
When you are an official business, you can write off most work related expenses on your taxes, including education and training expenses.
So not only can your write off the expense of forming the business to begin with, you can write off things like: a computer, a laptop, a desk, an office chair, monthly internet expenses, and website hosting, part of your home expenses, meals and entertainment, and best of all your membership to Powerhouse Affiliate is a tax write off :).
The Serious business Vs Personal Hobby Mindset
It is a fact people get more serious when they form a business as an affiliate. There is a sense of ‘ownership’ when going through the process of creating an official business. It helps you get out of the ‘I really like affiliate marketing’ mindset, and into the ‘I’m Going to Kick Affiliate Marketing’s Ass’ mindset.
This is a big difference in thought process. The more you treat your online affiliate marketing as a business, the sooner you will make it a profitable venture.
When you form a business, you are essentially creating a new entity apart from your own personal finances. It does not always mean you are not 100% liable for how the business operates, (you can still get sued!) but it does often come with some protections on your own finances or assets which again is different depending where you live.
There are a few different types of business you can form. In the US the LLC is popular for its flexibility, ease of set up, and cost. The same goes for Corporations in Canada. In most cases these can be set up properly for less than $1000 if you use a lawyer. We recommend a lawyer since they can advise on all the requirements, tax information for affiliate marketing, and can give you all the required documentation. If you try and do it yourself you risk the possibility of missing some important documents required for setting it up properly.
Another strong piece of advice is to hire an accountant even if it is just for the initial set up so that they can advise you on all the benefits and requirements for having a LLC or Inc. or whatever other business model you choose. The total costs for lawyer and accountant could be $1500. Really it is a cost worth considering since you will then know that everything is done right and legal.
You can set up any LLC through LegalZoom, or if in Canada you can do it yourself usually on any government website for your province.
It can take less than 30 minutes, and you can have a legitimate business!
If you are serious about this business and want to do it right then forming a legal business is probably a good idea. The most important things to consider are your own tax laws, and what benefits you get to forming a business as opposed to operating as an individual. Most of the information you need about taxes can be found on your own government’s websites or by calling your government. In Canada it is Revenue Canada, or United States it is Internal Revenue Service.
A lawyer and accountant can be extremely helpful in setting this stuff up the first time, although it is not always necessary. If you are good at reading and following instructions then it can probably be done on your own.
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