Network Marketing Tax Deductions for Your Business

When you participate in network marketing, you are classified as an independent contractor or sole proprietor for tax purposes. This self-employed status means you operate your own business, which allows you to deduct business-related expenses from your income. This is a benefit not available to traditional employees.

The income you receive is reported by the company on Form 1099-NEC if you earn over $600. This structure makes you responsible for your own tax obligations, including income and self-employment taxes.

Establishing Your Business for Tax Purposes

To claim business deductions, your network marketing activity must be operated with the intention of making a profit. The Internal Revenue Service (IRS) distinguishes a business from a hobby, and this determination is foundational for your taxes. If an activity is classified as a hobby, you must still report the income but cannot deduct the related expenses.

One significant indicator of a profit motive is whether the activity has been profitable in at least three of the last five consecutive years. While not a rigid rule, meeting this safe harbor benchmark creates a presumption that you are engaged in a business. The IRS also considers whether you conduct your activities in a businesslike manner, which includes maintaining complete and accurate books and records.

Other factors the IRS considers include:

• The amount of time and effort you invest in the activity
• Your dependency on the income for your livelihood
• Your level of expertise in the field
• Whether you have changed your methods of operation to improve profitability
• Whether you have a history of success in similar ventures

No single factor is decisive; the determination is based on all the facts and circumstances.

Common Deductible Business Expenses

An expense must be both “ordinary” and “necessary” to be deductible. An ordinary expense is one that is common and accepted in your type of business. A necessary expense is one that is helpful and appropriate for your business.

Cost of Goods Sold

For network marketers who sell products, the Cost of Goods Sold (COGS) is a primary deduction. This includes the purchase price of products you buy for resale, but you cannot deduct the cost of inventory until it is sold. At the end of the year, you calculate the value of your ending inventory, which becomes the beginning inventory for the next year.

Product samples used for demonstration can also be deducted. The cost of these samples is deducted in the year they are used, not when they are purchased.

Home Office

If you use a portion of your home exclusively and regularly for your network marketing business, you may be able to deduct home office expenses. The space must be used only for your business and on an ongoing basis. This area must also be your principal place of business, where you conduct substantial administrative or management activities.

There are two methods for calculating the home office deduction. The simplified method allows a standard deduction of $5 per square foot of office space, up to a maximum of 300 square feet, for a total deduction of $1,500. The actual expense method involves calculating the percentage of your home used for business and applying that percentage to direct and indirect home expenses, such as mortgage interest, insurance, utilities, and repairs.

Car and Vehicle Expenses

When you use your personal vehicle for business activities, you can deduct the associated costs. Qualifying travel includes driving to meet with potential clients, delivering products, or attending business-related meetings. Since a home office is often the principal place of business for a network marketer, trips from home to other business locations may qualify.

You can calculate your vehicle deduction using one of two methods. The standard mileage rate allows you to deduct a set amount per business mile driven; for 2025, the rate is 70 cents per mile. The actual expense method allows you to deduct a percentage of your total vehicle costs, including gas, oil, repairs, and insurance, based on the ratio of business miles to total miles driven.

Marketing and Advertising

The costs of promoting your network marketing business are fully deductible. This includes expenses like printing business cards, flyers, and brochures. Digital marketing expenses are also deductible, covering fees for a business website, social media promotions, and online ads.

Business Travel and Meals

Expenses for overnight business travel away from your tax home are deductible, including the cost of transportation, lodging, and incidentals. To qualify, the trip must be primarily for business purposes.

The cost of business meals with clients, potential recruits, or team members where business is discussed can also be a deduction. You can deduct 50% of the cost of business-related meals.

Essential Recordkeeping for Deductions

To claim any business deduction, you must have records to substantiate the expense. The IRS requires that you maintain evidence that can prove the amount, date, place, and business purpose of each expense. Recording expenses as they happen is highly recommended.

Receipt Management

You should keep all receipts for your business purchases, including invoices, credit card slips, and canceled checks. Using accounting software or apps to digitize and categorize receipts can simplify the process at tax time. The IRS recommends keeping records for at least three years after you file your tax return.

Mileage Logs

For vehicle expense deductions, a detailed mileage log is a requirement. Your log must contain the following for each business trip:

• The date
• Your starting point and destination
• The business purpose of the trip
• The starting and ending odometer readings

Separating Finances

Commingling personal and business funds can create bookkeeping challenges and may draw scrutiny from the IRS. Opening a separate bank account and obtaining a dedicated credit card for your business are practical steps to avoid this. A separate account creates a clear audit trail and simplifies tracking your business-related income and expenses.

Reporting Income and Deductions

All income from your network marketing activities must be reported. You will likely receive a Form 1099-NEC from your company if you were paid $600 or more, but you must report all income even if you do not receive this form.

The financial activity of your business is summarized on Schedule C (Form 1040), “Profit or Loss from Business,” where you report your gross income and list your deductible expenses. The net profit or loss from Schedule C is transferred to your main Form 1040 and becomes part of your total income.

This net profit is also used to calculate your self-employment tax on Schedule SE (Form 1040), which covers Social Security and Medicare taxes.