don't forget to tell us your tips on how you organize and prepare for tax season!

Don't forget to tell us your tips on how you organize and prepare for tax season!

Tax season is right around the corner for direct sellers. Are you prepared?

Consultants, have you kept track of your IRS tax deductions? Did you know that you can deduct such expenditures as meals, entertainment, home office space, and business and travel expenses on your taxes (within reason)?

Network marketing executives, do you know why MLM companies are not excluded from paying sales taxes? What is your approach to collecting sales tax?

The IRS offers a significant amount of advice for direct sellers when it comes to taxes. The IRS defines “direct sellers,” outlines their potential income sources and common expenses, as well as provides many tax tips for those who may need to refresh their memories for the 2013 tax season.

MLM expert attorney, Jeff Babener, discusses the issues of taxes in network marketing in his video: What are the Central Tax Issues for MLM?

Lastly, visit the mlmattorney.com tax page for links to the necessary publications/forms, the IRS withholding calculator, and many other small business resources. And, don’t forget to tell us your tips on how you organize and prepare for tax season!

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From a legal standpoint, you are an independent contractor because the company does not tell you when, where, and how to perform your tasks. If it did, you would be an employee. Adopting guidelines on ethical issues, consumer legal safeguards, and general rules for fair competition among distributors does not negate independent contractor status. Independent contractor status generally means that individuals are liable for their own income taxes, unemployment insurance, worker’s compensation, etc. In 1982, the federal government specially recognized independent contractor status of direct sellers, and many states have followed suit with specific legislation.

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Giant corporations have marketed some of their own products and services through network marketing. For many corporations who observed some of the earlier successes of this alternative channel of distribution, a number of conclusions were reached.

1.   It was a great way to introduce brand new products.

2.   It seemed to work well for products that needed demonstration or testimonial.

3.   It was a great way to reward the consumer for sharing excitement about products.

4.   This method could result in rapid penetration of the market.

5.   In that commissions were only paid on the movement of product, and massive and costly advertising campaigns could be avoided, it seemed efficient and economical.

6. In recent years, corporations expanded offerings far beyond home and personal care products to offer consumer services such as telecommunications, prepaid legal representation, financial products and consumer member benefits packages that offer customers significant savings across the board.

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Why Millions of People Are Getting Involved

Although network marketing isn’t for everybody, millions of people from all walks of life consider it to be the right opportunity at the right time. The fact is, becoming an independent distributor can fill important needs and fit within the time and money limitations many people face.

Practically No Investment Necessary

Most companies require only the purchase of a modestly-priced startup kit ($25 to $100) to join.

The Chance to Own a Business

Because network marketing can easily be done part-time, and worked around a full-time job, it gives people who work for someone else the chance to own their own businesses and jump into the world of entrepreneurship without the major economic and time investments that traditional business models require. In this world, they are rewarded for risk-taking, and have control over their working environments.

Earn Additional Income and Potential Tax Benefits

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So, What Attracts People to Network Marketing?

Although network marketing isn’t for everybody, millions of people from all walks of life consider it to be the right opportunity at the right time. The fact is, becoming an independent distributor can fill important needs and fit within the time and money limitations that many people face.

Virtually No Investment Required

Most companies require only the purchase of a modestly-priced sales kit ($25 to $100) to get started, which is much more economical than starting a traditional home business, which could cost hundreds of thousands of dollars.

The Chance to Own a Business

Because network marketing can easily be done part-time, and worked around a full-time job, it gives people who work for someone else the chance to own their own businesses and experience the world of entrepreneurship. In this world, they are rewarded for risk-taking, and have control over their working environments.

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Picture this – one sales call from you triggers sales presentations to 10,000 customers.  Can it happen? Yes. But how?

Network marketers should not overlook a golden opportunity to promote sales through nonprofit or charitable organizations. The distributor makes money and so does the organization.

The network marketing industry has become attracted to nonprofit organizations (NPO), their members and friends as a vast potential source of distributors. Handled correctly, the benefits of a networker’s involvement with an NPO are mutual and substantial. The tax-exempt organization receives a source of funds that are necessary to carry out its functions and to support the causes that are deemed worthy enough for tax-exempt status. The network marketing company gains access to a potentially large and motivated customer base.

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The key to avoiding an audit appears to lie in being inconspicuous. Some factors are of course beyond your control. The more you make, for instance, the more likely you are to be audited. The IRS has also shown a statistical probability that those who are self-employed are more likely to misstate income and deductions than those with salaries. You probably don’t want to purposely make less or change your business in order to avoid an audit. But below are listed some IRS red flags on which you can have an affect.

The first category is one especially important to MLM business people and direct sellers- business expenses. IRS tax examiners refer to deductions for home offices, business travel, and entertainment, and business use of an automobile as the “kiss of death.” Because they are often abused the IRS gives them closer-than-usual scrutiny, and requires strict documentation. The IRS often challenges these deductions knowing that many people do not keep the proper records and will not be able to defend their claims. The obvious solution for the taxpayer claiming these deductions is to carefully document the expenses.

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- Network marketing has been recognized as an important industry by the IRS.

- In 1982, the IRS specifically recognized the independent contractor status of direct sellers.

- The IRS specifically addresses the issues of network marketers in Small Business Tax Guide located at MLM Legal.

- One in ten thousand households in the United States has a direct seller.

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Seven reasons why network marketing offers a unique business opportunity:

1. It is low cost to start a business with minimal initial investment and overhead costs. Some companies charge as little as $20-$30 dollars to get started.

2. You can work part-time or full-time to make supplemental income or limitless earnings. The more you work, the more you’ll make. The amount of your income is completely up to you.

3. There is high income potential without years of experience or an expensive college degree. Direct selling companies don’t usually require experience of any kind. Therefore, there is no college degree or lengthy resume necessary.

4. You can have independence while still benefiting from a full network of support. Distributors can benefit from the support they receive from their sponsor and the company’s training programs.

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Distributors can save money on taxes by hiring their children and spouses. By hiring your children you can deduct their salary as a business expense and, because the child is employed by his or her parent, you’re not responsible for withholding social security and federal unemployment tax on the child’s wages.

Here are some limitations to this arrangment:

1. The salary must be reasonable to the child’s age and work performed. For example, you wouldn’t pay your seven year old $30 an hour.

2. The work performed must be necessary and required service to your business operations. No lawn mowing or dish washing.

3. The child must actually perform the work.

4. Document the hours and tasks your child performs in case you are even audited.

5. An actual payment must be made to the child, preferably from your business account. Be sure to check specifics with your tax adviser.

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