Finances: The Affiliate Marketer’s Guide To Paying Less Tax (Legally…)
“Nothing is certain in life but death and taxes.”
I earned over 7-figures in profit during my first year of affiliate marketing.
Lets just say that 23-year-old me didn’t know too much about business. So imagine the look on my face when I realized I had a HUGE tax bill to pay.
I was in the 39% federal tax bracket, and I had to pay 6% on top of that for Georgia taxes. I had no idea taxes were that high in the US.
Seriously….I thought they took the taxes out of my paycheck and that was it!
Fortunately, I didn’t blow all my money and was able to pay the taxes. But it gave me the incentive to learn more about business finances, accounting, and taxes.
But I’ve learned a few things over the years. One is that paying taxes is a good thing. If you’re paying less tax (or no tax), that means you’re either not profitable, or you’re being shady.
I’ll NEVER fuck with the government because I have no interest in learning how many packs of cigarettes I’d be worth in prison.
The good news is that there are ways to legally pay less tax, and I wanna share some of them with you.
- I am a U.S. Citizen and this only applies to USA. Sorry but I don’t know how things work in your country.
- I am sharing my experience. This is not legal advice. Get a professional accountant and lawyer. Good ones will save you money.
- I don’t have any advice when it comes to offshoring.
The Biggest Tax Problems We Face
When you work for someone else, they take part of your money out of every paycheck and give it the government.
Employees have to wait until April of the following year to get money back, but at least most of their taxes are easy to deal with.
When you’re an affiliate marketer, things are a bit different.
You Have to Pay Estimated Taxes Every Quarter
When you’re an affiliate, the government considers you self-employed. This means you have to pay your taxes – every quarter.
The quarterly tax deadlines for 2017 are:
- January 16
- April 18
- June 15
- September 15
The annoying thing about being responsible for paying quarterly taxes is that you have to estimate what your taxes will be for the full year, based on your earnings up to that point.
Unless you’re 100% perfect, one of two things is going to happen:
- Your best affiliate campaigns suddenly die at the beginning of the year. You’ve overestimated in the first and second quarter and overpaid to the IRS and need your money back, but you’ll still have to wait until the end of the year.
- Your campaigns become massive successes later in the year and you underestimated taxes, so you have to catch up because you’re now in a higher bracket.
You gotta monitor this carefully, especially if you make a million bucks in your first year.
You Pay a 15.3% FICA Tax
When you earn money as an affiliate, you have to pay taxes for future Social Security and Medicare benefits that come to a total of 15.3% of your earnings.
If you have a regular job, your employer takes on half the burden. If you’re a small business owner, you’re technically both your own employer and employee. That means you get to pay the full 15.3% yourself.
States Have Separate Payroll and Income Taxes
People usually think about the federal government when they talk about paying taxes, but state government taxes can be a house of horrors too.
Some state tax rates are insane. If you file your tax returns in NYC, I hope you’re cool paying 12.7% of your income to the state and municipal government. In Connecticut and New Jersey, the tax rate is also over 12%.
Falling Behind is Expensive
It’s easy to pay less tax by ignoring the fact you’ve gotta pay up and procrastinating on it. As affiliates, our income varies every day and remembering to pay taxes is entirely up to you.
As easy as it is to fall behind, don’t. You can face serious penalties and interest, which makes catching up difficult. The IRS can also garnish your wages, seize property or even slap handcuffs on people that refuse to ever pay.
I don’t wanna see any of those Rolexes end up in government auctions.
How to Slice Your Tax Bill and Still Sleep Easy
Alright, you probably needed a Zoloft after reading that. Don’t worry – there are ways to pay less tax too. You just gotta be smart about it.
Move to a Lower Tax State
One of the coolest things about being an affiliate is that you can live anywhere you want. So why live in a state with massive taxes without a good reason?
Tennessee, New Hampshire, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming are all states without income taxes. You can save thousands of dollars a year by relocating to one of them.
I lived in Florida for a while, so that helped out a bit 🙂
Find the Best Home Office Deduction Method
The IRS lets you take a home office deduction if you use a portion of your home specifically for your business. There are actually a couple ways to deduct it.
Your first option is to take a simplified option, which allows you to deduct $5 for every square foot of your property used specifically for your business. There are a couple of downsides to this approach though:
- Your deduction isn’t as high if you have a higher-priced property.
- You can’t deduct the depreciation of your home or recapture depreciation if you sell your home.
Instead, you can take the regular home office deduction. This option lets you write off a percentage of your rent or mortgage equivalent to the ratio of your office space to the size of the property you’re renting.
Calculating the regular office deduction is more tedious, but you may be able to save a few hundred dollars on your taxes, so don’t ignore it.
The only issue with the home office deduction is that it’s a huge red flag for an audit. Don’t claim it unless you:
- Use the area specifically for your business. If you’re audited, the IRS will measure it. They’ve been able to get tax deductions knocked down for people taking it, so make sure you get it right.
- Make sure the rest of your taxes are squeaky clean. The IRS will pour through every dime you made and every expense you claimed. If you aren’t sure your return can stand up to scrutiny, just don’t claim the home office deduction.
If you know that your taxes are done right, definitely claim it.
Write Off Health Care Costs
Track healthcare costs along with your other expenses. You can write off individual health care costs as a business owner, in addition to deducting up to $3,400 you place in a health savings account.
You can also deduct health insurance for yourself, spouse and dependents.
Keep Close Tabs on Your Expenses
One of the biggest misconceptions about starting an affiliate business is that you don’t have expenses. As you’ve probably noticed, they add up quick. You have to pay for many tools like:
- Analytics software (CrazyEgg, Hotjar etc.)
- Dedicated servers or VPS
- Link tracking software (Voluum, Adsbridge etc)
- Traffic source costs
- Learning and training (STM or courses like AFFcelerator workshops)
- Hardware (laptops / phones specifically for business)
You can write all these off.
Look into the Loss Carry forward Provision
If you lose money on your business, you can write those losses off up to 20 years in the future. You can deduct a loss in any of seven future years, which can help you offset high profits in the future.
This is a great option to consider if you’re on your way to becoming a super affiliate. If you had years when you lost money as a newbie, you can cut your tax bill quite a bit.
Consider Forming an S-Corp to Help Paying Less Tax
S-corps are their own legal entity, but they aren’t subject to double taxation like regular corporations. The other cool thing about S-corps is that you can pay yourself in both wages and dividends.
Why is this a good option for affiliates? Simple. Wages are subject to FICA taxes, but dividends are not. This means some of your earnings won’t be subject to the 15.3% bloodletting we talked about earlier.
Just keep in mind that if you form an S-corp in New Hampshire (one of the tax-free states I talked about earlier), the dividends you pay yourself will be subject to tax.
New Hampshire is the only state that taxes dividends but not regular income. However, the 5% dividend tax is still a lot lower than the 15.3% FICA tax that you’d pay to the IRS if it was counted as self-employment income.
Maximize Retirement Savings
If you haven’t hired employees, you can contribute up to $54,000 a year to your own retirement using a SEP IRA.
A SEP IRA lets you contribute a maximum 25% of your salary towards retirement (Max $54k a year assuming your salary is $216,000). The catch is you have to give that percentage to all your employees.
But if you’re the only employee or all your workers are contractors, then that’s a hefty amount you can put into retirement.
Use the Foreign Exclusion Income Act While Abroad
If you’re an affiliate that likes to travel (99% of them), you can avoid paying a large share, or even all of your earnings to the IRS. Anyone that spends up to 330 days a year in another country can claim this deduction under the Foreign Exclusion Income Act.
Just keep in mind that you’ll probably have to pay taxes to the country you are residing in if you’re considered a legal resident during that time.
You should be able to pay less tax if you’re constantly moving and living outside the US for more than the 330 days.
I think this is a big reason why some affiliates travel constantly 🙂
Work with a Professional to Legally Pay Less Tax
I can’t emphasize this enough – get a GOOD accountant.
Yeah, you have to pay them for their services, but they almost always get you more money than you pay. They also drastically reduce your chances of being audited or paying a penalty.
Ask them the hard questions straight away and think of it as an interview where you are hiring them. Don’t just go with the first guy.
(For $250 per hour you wanna get your money’s worth from a CPA)
Now, time for a disclaimer…
I studied marketing in college. I’m not an expert in tax law by any means so this isn’t financial advice, it’s just a guide to take some ideas from.
Ask your accountant if these tips would work for you – I don’t wanna see any of you guys getting slammed by the government for trying to save a few k.
Also, this is just from my experience in the USA. You guys in Russia, UK, India, Singapore etc… I don’t know if this will be much help.
But anyways, I tried to put as many links to the sites where I found this info so you can get more info. Check them out, talk to the pros and figure out what’s best for your situation and your country.
Make Tax Planning a Year-Long Effort
Don’t wait until April to think about your taxes.
The US government gives out some pretty serious penalties if you don’t have your taxes in order.
I don’t wanna see any of you guys on the bad side of D.C!
What’s interesting is some affiliates can pay close to 50% of what they earn in taxes. If you think about it, focusing on saving taxes can do more for your bottom line than another campaign :-).
Got any other tax saving strategies you use?
Let me know which country it’s for and what the strategy is so we can all save.