Many direct selling business owners have no idea what they should think about when filing taxes for the coming year. Taxes are inevitable, but understanding the numerous accounting components available to your business and optimising your deductions may make the process smooth and stress-free. Here are some tax considerations for all direct selling companies, as well as how they may affect you.
Self Employment Tax
Self-employed direct sellers are subject to the same self-employment tax laws as other taxpayers. This usually means that the business’s income and costs are recorded as self-employment income on Schedule C. As of 2020, any net profit reported as ‘self-employment’ income is subject to a 15.3 percent tax, which works similarly to company employees who have social security and Medicare taxes taken from their paychecks.
Learning how your products are taxed in different states is another crucial aspect of dealing with sales tax. Some states may offer tax exemptions for your product, while others may not, and specific restrictions, such as a taxable threshold, may apply. New York, for example, exempts footwear from sales tax if the item costs less than $110.
Certain states also hold annual sales tax holidays on various products. The emergency sales tax holiday proclaimed by Puerto Rico on critical commodities to help ease tax obligations on its inhabitants dealing with COVID-19 consequences is a good illustration of this. It is critical to understand the general taxability of your items.
Do you know what you’re getting and how to manage it if a customer hands you a sales tax exemption certificate? Is honouring a sales tax exemption certificate required? Is this the correct paperwork? Is it finished? Until you’re confronted with this circumstance or a sales tax audit, this level of detail may appear unimportant.
Knowing the basic direct selling tools and avoiding common errors can help you save a lot of time. Save your customer service department the trouble. Tax exemption documentation is crucial for both purchasing and selling purposes. Learn and understand the fundamentals.
Home Office Deductions
If you utilise a section of your house for your business, you may be able to claim a home office deduction for that percentage. This section of the home must be used exclusively for business operations to qualify for this deduction. With so many people working remotely these days, it’s crucial to remember that multi-purpose rooms like the kitchen table, guest room, and so on may not fit the requirements.
You may evaluate which strategy is the most helpful for your direct selling business by evaluating the facts and conditions of your company.
Cost of Goods Sold Calculation
Direct selling companies can deduct the cost of goods sold from their profits. Consider the following factors while making this assessment for your company: Inventory at the start of the year, personal purchases, labour expenditures, materials and supplies, other manufacturing costs, and inventory at the year-end are all included.
All of these are taken into account when calculating the cost of goods sold that you might claim on your taxes. The IRS encourages firms to build dependable record-keeping systems to accurately report all income, as this can be a complicated computation.
Many direct selling companies send inventory to independent contractors to sell later. When the inventory is delivered, who is the legal owner? Is the company keeping track of where its inventory is?
These are critical aspects to evaluate when drafting your contractor agreements since inventory may trigger income tax nexus, requiring the company to submit an income tax return in each state where it owns and retains inventory. Consider transferring legal ownership of merchandise to the contractor when it is delivered to prevent this problem.
Direct selling businesses typically employ hundreds to thousands of independent freelancers. The IRS requires firms to file Form 1099-NECs (Non-Employee Compensation) informative returns every year to detail the amount paid to each independent contractor. The IRS receives this form, and a copy is supplied to the contractor to use in filing their tax return. Payments to contractors that exceed $600 in a taxable year necessitate 1099.
Sales Tax Concerns for Direct Sellers
Are you new to direct sales? Then you’re also unfamiliar with its sales tax issues, which are numerous. Here we will take a look at the major ones and figure out how these concerns are intertwined.
Sales tax nexus
To comply with tax laws, you must first determine where you have nexus or a connection that allows a state or locality to tax your company. Physical presence is how most direct sellers build linkage. If you run a business in Alabama, you’ll almost certainly be required to collect and remit sales tax there. Each state has its nexus requirements, but for direct sellers, it’s usually about actual presence in the state.
Because independent sellers would likely trigger physical presence nexus long before they reached an economic nexus level, economic nexus does not apply to direct selling organisations .
Taxability of goods
The taxes you pay are determined by the things you sell in addition to your physical location. And the more states you do business in, the more difficult it becomes.
Vitamins and nutritional supplements are taxed at a reduced rate in Illinois and Utah, while they are exempt in 12 other states and the District of Columbia.
Clothing and food are included in a wide range of state tax duties. States prefer to keep things interesting by classifying the same commodity under separate titles.
The state in which you operate or employ 1099 independent contractors isn’t the only factor to consider; the several jurisdictions within those states are equally significant. Again, the more representatives you have in more local jurisdictions, the more difficult it will be to comply with tax laws.
More than 13,000 sales tax jurisdictions in the United States have the authority to levy taxes. The state tax authority administers the majority of local taxes, however, some are not. Certain counties in the state collect and administer their own sales taxes, some with very specific geographic restrictions.
<p>We hope that as tax season approaches, these suggestions will assist your company in succeeding in the coming year. Consider speaking with a tax advisor about what these recommendations could imply for your direct selling business.</p>