Do You Have to Pay Taxes on Affiliate Marketing?

Affiliate marketing involves promoting products or services for other companies and earning commissions on sales or leads generated. Income from affiliate marketing is generally subject to taxation. Specific tax obligations are influenced by factors like the amount earned and whether the activity is classified as a business or a hobby by tax authorities.

Characterizing Affiliate Marketing Income

The Internal Revenue Service (IRS) distinguishes between income generated from a “business” activity and a “hobby” activity, a classification that significantly impacts tax treatment. Affiliate marketing activities typically fall into one of these two categories. A business operates with the primary intention of making a profit, while a hobby is pursued for personal enjoyment or recreation, even if it generates some income.

The IRS uses several factors to determine if an activity is a business. These include whether the activity is conducted in a businesslike manner, the time and effort invested to make it profitable, dependence on the income for livelihood, and if losses are normal for a startup or due to uncontrollable circumstances. Other considerations include prior success in similar activities, changes made to improve profitability, and the expectation of future profit from asset appreciation. If deemed a business, all ordinary and necessary expenses can generally be deducted, and business losses can offset other income. If classified as a hobby, income is still taxable, but related expenses are not deductible as of tax year 2018.

Reporting Your Affiliate Marketing Income

Affiliate marketing income, like other self-employment earnings, must be reported to the IRS. Many affiliate marketers receive Form 1099-NEC, Nonemployee Compensation. This form is issued by affiliate networks or merchants if they have paid an individual $600 or more in the tax year. The 1099-NEC reports total earnings.

Even if an affiliate marketer does not receive a Form 1099-NEC for earnings under $600, all income from affiliate marketing must still be reported. This includes commissions, bonuses, and other compensation. The primary form used by self-employed individuals, including affiliate marketers, to report income and expenses is Schedule C (Form 1040), Profit or Loss from Business.

Schedule C combines and reports gross income from all affiliate marketing sources. It also allows for the deduction of eligible business expenses, determining the net profit or loss. This net amount is then transferred to the individual’s main Form 1040 tax return. Accurate record-keeping, including 1099 forms and payment receipts, supports reported income and expenses.

Deductible Expenses for Affiliate Marketers

Affiliate marketers can reduce their taxable income by deducting ordinary and necessary business expenses. These are common and helpful costs for affiliate marketing. Meticulous records of all expenditures are important to substantiate deductions.

Common deductible expenses include website hosting fees, domain registration, and premium website plugins. Software subscriptions for email marketing tools, analytics platforms, or graphic design software are deductible. Advertising costs, including paid advertisements on platforms like Google, Facebook, or Instagram, qualify as business expenses.

Office supplies, such as desks, chairs, or computer accessories, are deductible if used for business. Internet and phone service costs can be partially deducted for business use. If a dedicated space within the home is used exclusively and regularly for the affiliate marketing business, a home office deduction may be claimed. This deduction can include a portion of rent, mortgage interest, utilities, and home insurance, based on the percentage of the home’s square footage used for business. The simplified home office method allows a deduction of $5 per square foot for up to 300 square feet, with a maximum deduction of $1,500.

Estimated Taxes and Self-Employment Tax

Self-employed individuals, including affiliate marketers, are required to pay estimated taxes throughout the year if they expect to owe at least $1,000 in taxes. This ensures income tax, Social Security, and Medicare taxes are paid as income is earned, rather than in a single lump sum at year-end. Estimated taxes are paid in quarterly installments, with specific due dates in April, June, September, and January of the following year. Underpaying estimated taxes can result in penalties. Penalties may be avoided if at least 90% of the current year’s tax liability or 100% of the prior year’s tax liability (110% for high-income taxpayers) is paid through estimated taxes or withholding.

Affiliate marketers are also subject to self-employment tax for Social Security and Medicare contributions. The self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. This tax is calculated on 92.35% of net earnings from self-employment. The Social Security portion applies up to an annual earnings limit, while the Medicare portion has no earnings limit. One-half of the self-employment tax paid can be deducted when calculating adjusted gross income.