Affiliate Commissions - Who Pays The Taxes?

Profile picture of the author boaterscott by boaterscott Posted: 12/06/2009
I have just set up my first affiliate program, and I want to affiliates may a large commission in order to really motivate them to sell - perhaps 75% or more.

My question is, if an affiliate sells a $100 item, and I decided to pay them $75 for that sale (75%), am I going to have to pay taxes on the whole $100 amount at the end of the year? OR do people use a W-9 IRS form (from my understanding this form allows the income to "flow through" the other person or company so they pay taxes on whatever I pay them?)

I don't mind paying the taxes if it helps build my list and sell products, I'm just curious how this works.
#affiliate #commissions #pays #taxes

  • Profile picture of the author SeanSupplee
    SeanSupplee
    You pay your income as taxes and commissions paid out are written that way on your tax forms. Then they pay taxes on the commissions they earned form you.
  • Profile picture of the author boaterscott
    boaterscott
    Sean -

    First all of - thanks for helping out.

    So just to clarify (I'm not the best with taxes and I'll be talking to my accountant soon anyway), you are saying that I will note the commissions I pay out on my taxes (and of course the I'll disclose my income too). So basically, if we use my $100 example in the end I would only pay on the income that I keep, in this case it's $25 - right?

    Are there any forms that an affiliate needs to fill out, or is it just up to them to disclose whatever they make to the IRS?
  • Profile picture of the author entrepenerd
    entrepenerd
    If you're running your own affiliate program (not through Clickbank or something similar), then you'll want to have your affiliates fill out a W-9 to get their SSN. Then if an affiliate earns more than $600 in commissions from you, you will need to send them a 1099 that declares the money that you paid to them. That 1099 will also need to be filed to the IRS as part of your taxes.

    To be honest, this is why many vendors go with 3rd party affiliate managers like Clickbank. CB takes care of paying the affiliate and handling the tax forms. The only money you actually collect is your portion and that's all you're responsible for paying taxes on.

    Hope that helps.

    Make sure you talk with your accountant on this, and make sure they are a "tax" accountant. You need someone that specializes is taxes, not just bookkeeping.
  • Profile picture of the author SageSound
    SageSound
    If you use an instant commission payment script like RAP or 7DS, then you don't have to worry about it since you're not collecting the monies and then disbursing them.

    If you use someone like Clickbank, THEY pay the affiliates out of your earnings, so you don't have to deal with it either.

    But if you run your own affiliate program and collect 100% of the sales revenues up front, and then pay affiliates yourself later, those expenses are considered "commissions" and are deductible from the gross income.

    And just remember ... 75% of $5 is a lot less than 75% of $1000. It's not the percentage, it's the total dollars you're dealing with.

    Lots of choices.
  • Profile picture of the author cherylwright
    cherylwright
    I'm in Australia and pay affiliates directly. I don't declare anything to any governments except my own income.

    As far as I'm aware, affiliates are responsible for declaring their income. Part of the affiliate agreement I use tells potential affiliates this is the case.

    This possibly goes against US laws, but I'm not in the US.




    Cheryl
  • Profile picture of the author ExRat
    ExRat
    Hi Cheryl,

    I'm in Australia and pay affiliates directly. I don't declare anything to any governments except my own income.
    I'm not an accountant or in Oz (wish I was in Oz though!) but by the letter of the tax law over here, I *think* you are supposed to declare the affiliate payments as income, and then deduct them as an expense - because of course, by not doing so you are creating a lower turnover than you actually have.

    So if you received $100 for a product sold by an affiliate, you would declare it within your turnover. Then if you paid out $75 to your affiliate, you would then deduct this from your final profit as an expense - IE you would make $25 profit (before other non affiliate related expenses) but your turnover would still be $100.

    But what you *actually* do is up to you and between you and your accountant. I'm just making the point that if someone wanted to understand what they would have to do to be squeaky clean, then I *think* that this is how it works in the UK - unless of course, the commission is paid directly to the affiliate at the point of sale as if it were *their* sale (as with R.A.P., where the total sale is not split, but rotated, which makes the affiliate become like the vendor on alternating sales) OR in clickbank's case where they are the vendor, and they pay the product creator and the affiliate the payments after the sale - in which case, their turnover is higher.
  • Profile picture of the author cherylwright
    cherylwright
    This is what happens when you rush a post. Sorry.

    I declare the money, but not the individual affiliates income. I hope that makes more sense, and you can see I'm not trying to rip off the Australian government.




    Cheryl
  • Profile picture of the author Golf Guru
    Golf Guru
    Originally Posted by boaterscott View Post

    Sean -

    First all of - thanks for helping out.

    So just to clarify (I'm not the best with taxes and I'll be talking to my accountant soon anyway), you are saying that I will note the commissions I pay out on my taxes (and of course the I'll disclose my income too). So basically, if we use my $100 example in the end I would only pay on the income that I keep, in this case it's $25 - right?

    Are there any forms that an affiliate needs to fill out, or is it just up to them to disclose whatever they make to the IRS?
    Yes, entrepenerd is right. Clickbank is valuable because they take care of this for you. I am assuming Clickbank also knows the tax reporting laws for those affiliates outside the US and takes care of that as well. Otherwise you have to have each affiliate file a W-9 form and issue them a 1099 at the year end (or whatever else the resident country requires). So you pay taxes on your $25 and they pay taxes on their $75 and Uncle Sam wins
  • Profile picture of the author JohnMcCabe
    JohnMcCabe
    In the USA, if you file a Schedule C for your business, you declare your sales and then deduct the commissions paid as expenses. You then calculate tax on the difference.

    In other words, if you make sales of $1,000,000 and have expenses (commissions paid, overhead, etc.) of $999,000, you would calculate tax on the net of $1,000. Not the million.

    Helps?
  • Profile picture of the author dljmktg1
    dljmktg1
    There are a lot of correct answers here depending on how the money is collected.

    If an agent such as Clickbank, etc pays the money, just deal with what they pay YOU.

    But, if you actually collect the money yourself.... (in the USA)

    You declare everything, then...
    You deduct what you pay out in commissions.

    The other thing is that if you pay out the commissions yourself, you must provide everyone you pay $600 or more to with a form 1099MISC. A copy is also sent to the IRS. This forces the affiliate to declare the income, and proves to the IRS that the deductions are legit. You would be surprised at the amount fraudulent claims on schedule C's. You can get the 1099MISC form free from the IRS website.


    By the way, my offline employment is as an income tax professional. My main specialty is self employed taxpayers, which most of us probably are. If you have specific questions, PM me the details and I'll do my best to answer. (US income tax only)

    Dan
  • Profile picture of the author DWhyte
    DWhyte
    Can anyone elaborate on the the rules and regulations of paying taxes in the UK for affiliate commissions?

    Thanks
  • Profile picture of the author entry
    entry
    what about for uk affilaites, who pays for the taxes?

    and uk peoples 'own' ebooks too? who pays their taxes?
  • Profile picture of the author plester
    plester
    baoterscott,

    you may want to consider operating under an LLC

    you can get more info about that as well as other legal related info at very affordable rates at legalzoom.com

    Robert Shapiro started legalzoom a few years ago,and if you don't know who he is he's a very famous attorney to the stars.

    he represented o.j simpson as well as michael jackson just to name a few.

    hope that helps,

    Paul
  • Profile picture of the author boaterscott
    boaterscott
    Great answers - as always many many thanks. Didn't OJ go to jail anyway? Oh, different crime, I forgot

    I am going to start an LLC at the first of the year to start off fresh.

    The reason why I posted is that I thought it would be difficult to track down affiliates and have them fill out a tax form. I was thinking this would scare some away.

    Now if I could just figure out Clickbank...

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