What would you say if I told you there is a way to earn more money with your direct sales business, and you do not have to sell more products or recruit more team members to do it?
How does that sound to you?
Well, instead of showing you how to earn more, I will show you how to keep more of your money and pay less tax on it with these easy-to-track direct sales tax deductions.
Calculating your taxable business income correctly and not missing potential tax deductions is key to keeping as much of your income as possible.
As I told you in our story, my wife got into direct sales for the free stuff, so taxes were not even in our minds then.
Once my wife started being more and more successful, and we had to pay a pretty hefty tax bill, we knew we had to get serious about writing as much off as we possibly could.
We also knew we had to get serious about tracking everything.
Those early days of struggling with a spreadsheet were not super fun, but it allowed us to have good records and maximize our deductions.
So, of course, we now use Direct Sidekick to make it all quick and easy to track all of our income, expenses, and inventory.
Why are direct sales tax deductions so important?
Tax deductions can have a huge impact on any direct seller’s bank account! Meaning, they can save you a lot of money.
Here is a quick example. Let’s say you earn $30,000 in total income in a year. Currently, the federal self-employment tax rate is 15.3% which would require you to pay $ 4,238.87.
Now, what if you were able to deduct more things from your earnings? How would that impact how much you have to pay in taxes?
Let’s say you were able to deduct $5,000 in expenses. Your new tax bill would be $3,532.39.
That could be a savings of $706.48!!!
Would $706.48 make a difference in your life? What would you do with the extra money next year?
Now, what if you kept really good records and found $7,500 in tax write-offs next year? This will include your mileage tracking, writing off your home office expenses, and all the other write-offs listed below.
These additional write-offs would lower your taxable business income to $22,500 and lower your tax bill to $3,179.15.
That would save you a total of almost $1,060!!! Now that makes a difference.
Early on, a lot of direct sellers are just like we were. They either don’t know what they can write off on their taxes or don’t think it is worth their time. Too bad, as this is very easy to do and can pay off very well for direct sales representatives.
Here are the direct sales tax deductions:
Income is everything you have earned. Sounds simple enough, right?
But what about products you were “given” by your company for recruiting or having a certain number of parties in a given month?
That’s all considered income to you as well, and if you check your 1099, it probably shows up there.
Income includes things like free products received, incentive trips earned (although you can write that off as we will see later), and products “purchased” with “shopping sprees” or credits earned.
Some direct sales companies give their consultants shopping sprees (credits) that they can use to buy company products.
This only becomes income when used to purchase products unless your company includes this on your 1099.
My wife’s shopping sprees go away if she doesn’t use them, so she does not earn anything until she actually does (of course, she always does).
Of course, any commission you make on your own sales or your team/downline sales is also added to your income.
If you are just starting out as a direct sales consultant, you can deduct up to $5,000 in business startup costs and $5,000 in organizational costs. Examples include:
- Your starter kits.
- Fees you paid to become a consultant.
- Costs you incurred researching different companies.
- Any fees you paid for training.
Organizational costs are costs you paid to set up your business entity (highly recommended).
Cost of Goods Sold
There is a lot of misunderstanding about handling inventory for direct sales businesses. Many people are unsure if they are required to track their inventory and when to write off its costs.
To be very clear, if you receive and hold any product for resale, you must track your inventory and costs for the inventory.
When you sell the inventory, you are allowed to write off the costs for those products.
However, you will not write off the costs when you purchase the product, only when you sell it.
Let’s use an example to illustrate this:
On December 1, 2016, I purchased ten of my best-selling products for $20 each for a total cost of $200. On February 4, 2017, I had a vendor event and sold 5 of the products. When do I write the cost of those products off?
I can write off the cost of the products in February 2017 and not December 2016.
How is Cost of Goods Sold (COGS) calculated for direct sellers?
The first thing to remember is that this is all using YOUR COSTS for the products, NOT the retail cost.
Beginning Inventory – Adjustments + Inventory added during the year – Ending Inventory.
For example, let’s say I started the year with $2000 worth of products. Then, I used $200 of products for personal use, purchased another $500 in new products, and ended the year with $800 of products left.
My cost of goods sold will be $2000 – $200 + 500 – $800 = $1500 COGS
Of course, many direct sellers join specifically for free products. Unfortunately, you cannot deduct the products used for personal use, as seen above.
You may also write off products given away as samples or incentives to host parties as an advertising expense and not part of cost of goods sold (see next point).
COGS sounds difficult, but Direct Sidekick provides a full COGS report so you don’t have to calculate the numbers yourself.
Expenses for advertising your business include:
Car and Truck Expense (Mileage)
The mileage deduction could be one of the more significant tax deductions you will have in direct sales. This, of course, assumes you travel to home parties or vendor events. My wife’s mileage deduction was her second-largest deduction category last year.
For 2023 the mileage rate is 65.5 cents per mile. What that means is if you drive 40 miles round trip for a home party, you can write off $26.20.
Well, what if you do one party per week, 50 weeks per year?
This could be a write-off of $1,310!
I highly recommend getting a good mileage tracking app for your phone that tracks every trip AUTOMATICALLY for you. At the very least, a pad of paper always in your car to track your mileage, including:
- Your mileage
- The dates of your business trips
- Places you drove for business
- The business purposes for your trips
Remember, you can write off your miles to the bank to deposit your party checks, the post office to send thank-you letters or hostess packs, or when you drive to purchase office supplies, or anything related to your direct sales business.
Don’t miss mileage deductions!
Once you have a good tracking app, it is effortless and can be a significant write-off for you.
Contractors may be someone that you paid to set up a website for you. It is also possible to have an assistant as a contractor, but there are many rules to ensure she is not your employee. This includes not setting their hours among other things.
If they are working on their own time and not considered an employee, you can write off what you pay them in this category.
If you’re unsure, I suggest discussing it with your accountant.
If you pay a contractor (an individual or LLC) more than $600 in any given year, you must provide them with a 1099-MISC by January 31st.
Legal and Professional Fees
Legal and professional fees include attorney fees, accounting fees, and other fees for professional services you use.
Office Expenses are the expenses of running an office. Think about monthly or yearly costs for apps such as Direct Sidekick and other software you may use.
If you pay a monthly fee to your direct sales company for an office suite or website, this is an office expense.
If you have a website, hosting fees and annual domain name registration fees are also deductible expenses.
Supplies are the things you purchase for your office. Think tangible, traditional office supplies here.
- File folders
- Printer paper
- Thank you cards
- Printer ink or printing services
Do you have to pay state taxes on your business? Well, great news (please read the sarcasm here)! You can write it off.
Here are taxes that may be written off:
- Income taxes paid at the state level.
- Employment taxes. If you have an employee, you can write the taxes you paid for them out of your pocket, such as social security, Medicare, and unemployment.
- Self-employment taxes. I deducted this from the examples at the beginning of this article when calculating how much you can save by tracking tax deductions. As you are self-employed and paying self-employment taxes, the IRS allows you to deduct 50% of the taxes paid.
Travel write-offs can be a bit tricky.
You must keep great records and make sure you are only writing off business travel.
You may deduct the following expenses while traveling for your business:
- Your transportation such as airplane tickets, bussing, taxi, and car rental.
- Baggage and shipping, including if you have to ship supplies or inventory to the location.
- Car expenses, whether rental or standard mileage. Also, tolls and parking fees.
- Costs for your lodging (hotel, condo, etc.).
- Your meals. You may write off 50% of your meals during your trip.
- Dry cleaning and laundry expenses.
So what to do if you are combining business travel with a family vacation?
If this is the case, you can only deduct things that are directly related to your business. You may not deduct expenses for your entire family if you are the only one working.
For example, if my family travels with my wife for her business, we can only write off the cost of a room that she would need, not the total cost we incur. If a single room costs $125 per night, but we have to upgrade for the entire family to a room costing $200, we can only write off the $125.
Kiekover, Scholma & Shumaker, PC has an excellent article on combining vacation and business travel to maximize your deductions. One key point is to have at least one business appointment scheduled BEFORE leaving for your destination.
We were blessed with an all-expenses-paid trip to Hawaii. We added a few extra days on top of that.
The cost from the company showed up on her 1099 as income, and we were allowed to write that off.
But, of course, we were not permitted to deduct the extra personal days we added as we did not have business appointments scheduled for those days before we left for the trip.
Your direct selling business is not done solely in your home office, is it?
How many times have you met with a potential recruit for coffee or lunch?
You can write this off. As with all expenses, please keep your receipt and jot a note on it to remember who you met with and what you discussed.
To write this off, you must have a business-related discussion during the meal. So, for example, if you are friends with the recruit, getting together for dinner on Friday night, and never talking about the business, you cannot write it off.
How much can you deduct?
When it comes to meals, you can deduct 50% of the total amount you paid. For example, let’s say you spend $50 on a meal with a potential recruit.
You can deduct $25 for that meal from your taxes.
Still, record the total amount and keep your receipt.
You cannot deduct the total cost if you split the bill, only the amount you paid.
Similar to the contractor expenses above, you can deduct all costs due to having an employee.
If you hire an employee, you will have to handle payroll and employee taxes.
Do you have an assistant working with you? Some direct sales consultants do.
They have someone help with setting up hostess packs, writing thank you cards, and so on.
If they’re an employing and you run payroll for them, use the wages expense category.
If you don’t run payroll for them, nor require certain hours, use the contractor expenses category.
Sometimes expenses don’t fit neatly into the other categories. That’s why the IRS includes an “Other Expense” category. Some things that fall under this category include:
- Education Expenses
- Subscriptions to professional publications
- Cell phones as a percentage of business use
The home office write-off is one of the wonderful perks of direct sales (as well as writing off mileage, of course). As long as you are using the office exclusively for your office, you can write it off.
With direct selling, you can also write off a home office used to store products and supplies, even if it is not used exclusively for your business!
The home office deduction is such a big deal that I have devoted another blog post solely to this topic.
Read the full home office deductions article.
Basically, with the home office deduction, you figure out the percentage of your home used for your office. Then, once you have that, you can deduct that much of your expenses.
For example, let’s say your home office is 10% of your house. You would then be able to deduct 10% of your mortgage or rent, utilities, property taxes, water, and waste disposal.
Wrapping it up
Tracking these direct sales tax deductions is simple to do with the right tools. Direct Sidekick offers an all-in-one web-based application for tracking your tax deductions.
We make this SIMPLE by automatically calculating your taxable business income in an IRS Schedule C Worksheet (Profit & Loss report) when you enter your transactions.
We do the hard work so you can spend your time on more important things!!!