According to the Direct Selling Association, 18.6 million people were involved in direct sales in the U.S. in 2017. Moreover, the majority of these direct sales workers are independent contractors who are responsible for their own taxes and costs of doing business. Luckily, the IRS affords you some direct sales tax deductions when you go to file taxes. When working in direct sales, you are eligible to take the same qualifying business deductions as any other independent contractor or self-employed worker, which can help lower your tax obligation to Uncle Sam come tax time.
The Home Office Deduction
If you’re in direct sales, chances are you use a portion of your home to conduct business. You'll be pleased to know that you’re able to take a deduction for your home office, if specific criteria are met. In order to be able to deduct your home office, it must be a designated space in your house that is used solely for the purpose of conducting business. Your home office doesn’t have to be in a separate room of the house, and you are able to use a portion of a larger room, as long as there is a clear partition that separates your personal living space from your home office. There are two ways you can calculate the home office deduction. You can use a percentage calculation based on the percentage of your home that's used for your direct sales business, or you can use the simplified square footage calculation to determine your deduction. A stop by the IRS’ website will provide concise instructions for both methods.
Can I Deduct Office Space Rent?
As long as you do not have interest in the property, if you’re paying rent for a dedicated office space, you are able to deduct 100 percent of the cost of renting the location because the entire location is used for conducting business in your tax preparation for direct sales. Much like the requirements for a home office, dedicated office space must also be used solely for the purpose of conducting business. Be sure to read IRS Publication 535, Business Expenses, for more information regarding deducting rent and lease fees on your taxes.
Writing off SECA Tax
As an independent contractor, you are responsible for paying your own direct sales income tax and Self-Employment Contributions Act, or SECA, taxes. SECA taxes include your contributions to Social Security and Medicare, and are 15.3 percent of your net income. SECA taxes are the self-employed version of Federal Insurance Contributions Act, or FICA, taxes that employees pay as part of mandatory payroll deduction. However, employers pay half of the FICA tax for their employees, but independent contractors are responsible for paying the full 15.3 percent themselves. Because of this, the IRS allows self-employed taxpayers to deduct half of this 15.3 percent in SECA taxes on their return.
All expenses for travel required during the course of running your business are deductible. You can write off airline tickets, hotel accommodations, meals and even tips paid to porters and restaurant wait staff. In order to deduct these travel-related expenses, you must keep accurate records of your travel, including the date and purpose of travel. Also, hold onto any receipts, canceled checks or any other proof of travel you have. This will come in handy if the IRS takes a second, closer look at your return, as you will be able to prove that your expenses were valid.
Continuing Education Deductions
When you attend any conferences, pay for trade organization memberships, purchase subscriptions or take any continuing education courses pertaining to your direct sales business, you can deduct these business expenses, too. All of the business deductions you take will directly lower the amount of income you are able to be taxed on, which can go a long way in lowering your tax obligation come tax time.
- H&R Block: Direct Sellers and Taxes – How Does it Work?
- IRS: Deducting Business Expenses
- IRS: Small Business and Self-Employed Tax Center
- IRS: Publication 535, Business Expenses
- DSA: Direct Selling Association Congratulates 2017 DSA Top 20 Members
- Direct Selling Association: Direct Selling in the United States: 2017 Facts and Data
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.