Welcome to the most important blog post you will ever read in your life. In case you have not yet realized, you are likely paying half or more of your earnings to uncle SAM in taxes.
In this post, I will show you how NOT TO PAY TAXES on your earnings from affiliate program commissions.
Ok. No. I do not want to go to jail for tax evasion advice. Neither do I recommend that you evade taxes. But did you know that companies are not required by the Internal Revenue Service (IRS) to send them a 1099 form disclosing your earnings?
Oh yes. The IRS is the government entity that has the authority to form, govern and enforce tax laws. Here is how it works when it comes to earning income from online activities such as affiliate commissions, advertising income, lead generation commissions, e-book sales, etc.
The IRS requires companies to send them what’s called a form 1099 at the end of each year. You may be familiar with this form as it is what contractors are issued for job performed.
The form indicates who the company paid (the person’s name, social security number and various other details). The IRS requires companies to send a copy of the same form to you, the person who was paid by the company for various services.
Every citizen is required to file taxes at the end of each year. When you file your taxes and have earnings from a 1099 form, the onus is on you to report your earnings. If you don’t report your earnings, the IRS will find out and chase you to collect its share. How will the IRS know that you haven’t reported all your earnings?
Remember that companies are required to send a copy of the 1099 form to the IRS as well. When received, the IRS takes this form and enters the information in their systems.
When you file your taxes, their system knows to look for the earnings amount stated on the 1099 form that is associated with your social security number. Yes, uncle Sam is smart and hard to fool. But let me show you how not to pay taxes on your earnings . . .
Although uncle Sam is smart, he is also very lazy. Uncle Sam doesn’t want to deal with peanuts and is only interested in big fish. Because of this, uncle Sam has given companies the option NOT to file a form 1099 in the event your earnings are under $600 for the year.
Uncle Sam doesn’t want to go through the administrative headaches for such a small amount, and neither are companies. Although they have the option to file, many companies choose not to. Why would they if it leads to more administrative tasks and expenses related to processing and mailing?
The idea here is to reduce the administrative tracking, reporting and processing burden on both the companies and the IRS. As a tax filing citizen however, you are still required to report your earnings. But do you see a disconnect here? Do you see a tax compliance gap?
Have a look at these three checks I received from ClickBank (a third party processing vendor through whom I sell multiple digital products). These are just three of the several I receive each month.
Notice that each check has my name on it, and each check was issued in the same month. Why didn’t ClickBank issue me just one check for the month?
(Click on check Image to view a larger size)
Check #1: Date 11/18/2010 Amount: $262+
Check#2: Date 11/18/2010 Amount: $252+
Check#3: Date 11/18/2010 Amount: $309+
Because I created multiple accounts with ClickBank, I am guessing that its back-end systems do not consolidate and treat each account as its own individual record. Either that or there is a glitch in the system that fails to put two and two together and link the information.
Because many systems are not sophisticated enough to put two and two together, many internet marketers who are making money online have figured out one way to avoid taxes. How so?
Because of the $600 threshold on 1099 reporting, many internet marketers spread their efforts so that they earn just under $600 for each online vendor they receive payment from.
Alternatively, multiple accounts are created with the same vendor to spread out the earnings so not a single account reaches the $600 threshold. Is doing this worth the time and hassle involved in opening accounts, tracking earnings and changing marketing strategies to spread earnings across the board?
Only you can answer that for yourself. Personally, I am better off focusing on bigger and better things. Not to mention that the underlying purpose for doing this is tax evasion, something I am not signing up for.
That said, this “strategy” is limited to starters. You may get away with this strategy in your first year or two in the business as your earnings will likely be relatively minimal.
But if you are to grow as an internet marketer, it will become difficult, if not impossible, to structure your accounts in a way to avoid 1099 reporting. If you are to grow, you will make much more than $600 and will have a lot more going on, enough to not spend valuable time evading taxation – which is a crime by the way.
Now there is legal a way to postpone paying taxes on your earnings if you’d like to go this route. Individual tax payers are cash basis tax payers, which means earnings are required to be reported when cash is received.
Many internet marketers choose to let their earnings balances pile up and redeem them later in a lump sum. The reasons can be countless. But suffice it to say that one can delay paying taxes on earnings up to 364 days.
Consider this example. Joe sells an e-book on ClickBank from January 1, 2010 through December 31, 2010 and earns $1,200. Joe lets his earnings pile through 2010 and redeems them on January 1, 2011.
Because Joe received the cash in 2011, he is required to report the earnings in his 2011 tax return, not on his 2010 tax return when he actually “earned” the money from e-book sales.
I acknowledge the gaps in the system, but the IRS has calculated its policies carefully so as to maintain a balance between potential loss of tax revenue vs. the cost of administrative burden resulting from accounting for and taxing every single earner, including those who earn less than $600 annually.
Many let earnings pile up to later redeem them in an attempt to delay taxation. I advise against this however. Not only will you miss out on cash flow, but God forbid the company that owes you the money folds and goes under? Yup – there goes your cash as well.
So with all that said, this post was meant to educate, not to contaminate, although I am sure people are constantly trying to find ways how not to pay taxes on their online earnings. As a country serving, law abiding and tax complying citizen, I urge you to do the same. So don’t get any funny ideas 😉
I am interested in your thoughts regarding this matter, so please share? Any additional legal ways on how not to pay taxes?
Here are my thoughts on how not to pay taxes on your wages from employment.Previous: How I Started, Marketed and Profited from the Sue the Airline Website