Tax Tips for Direct Sales Opportunities

September 20, 2017
 
The gig economy is booming. Many Hoosiers are among the 20.5 million people involved in direct selling in the United States. Direct selling companies tout the benefits of flexible hours, the ability to work from home, discounts on products for personal use, and incentives such as prizes and vacations to attract salespeople.

Regardless of whether you are selling cookware, cosmetics, insurance, wellness products, or handbags, there are some business and tax considerations to consider when participating in a direct selling business.

Multi-level Marketing vs. Pyramid Schemes
Multi-level marketing is a type of direct selling recognized by the Federal Trade Commission. In multi-level marketing, direct sales companies encourage existing distributors to recruit other salespeople and, in turn, the distributor receives a percentage of their recruits’ sales. This is also known as developing a “downline.”

Pyramid schemes are illegal business operations that seek to defraud customers in order to benefit company leadership. A tell-tale sign of a pyramid scheme is that compensation solely or primarily depends on recruiting others to sell, instead of selling the products and services to customers.

One way to protect yourself is to make sure your company is part of the Direct Selling Association (DSA, www.dsa.org).

Income Tax Considerations
Your compensation is based on sales and not on the number of hours worked. Sellers are not treated as employees of the company for tax purposes. Therefore, you will want to make sure you keep detailed records of your sales, income, expenses, inventory and mileage for tax purposes.
The various forms of income a direct seller may need to report include:

  • Sales
  • Commissions, bonuses, or percentages of income received from personal sales and those of your downline
  • Prizes, awards, and gifts received from the selling business
  • Products received for meeting certain sales quotas.

A direct seller must include all income received on the seller’s tax return regardless of whether or not he or she received an information return, usually a Form 1099-MISC reporting that income.

You may be required to pay estimated federal and state income taxes on a quarterly basis. For more information on estimated taxes for individuals, see https://www.irs.gov/pub/irs-pdf/f1040es.pdf and http://www.in.gov/dor/5310.htm

Sales and Use Taxes
Sellers are required to collect state sales tax on eligible items sold. Many times, the seller pays sales tax to the company as part of the price paid for the goods. However, it’s always good practice to check your invoice from the company to ensure that the appropriate state sales tax is collected.

Items withdrawn from your inventory for personal use are subject to Indiana Use tax. If you paid at least 7% sales tax at the time of purchase you do not owe a use tax. However, if you did not pay at least a 7% sales tax you may owe use tax. For more information on your use tax liability, please see https://secure.in.gov/dor/3761.htm

If you have questions regarding your tax liability, find a reputable tax professional with experience in preparing taxes for those involved in direct sales.