Affiliate marketing is a great way to increase your sales by letting your loyal customers and other advocates do the selling for you. If you are a business that runs an affiliate program, hopefully, your affiliates are working hard to sell for you. The more money you earn, the more they earn – it’s a great relationship! But if you aren’t following rules for affiliate marketing taxes carefully your affiliate program can land you in big trouble with the IRS.
What business owners need to know about affiliate marketing taxes
There are many affiliate program software and third party services out there. If you are hosting your own affiliate program with affordable software like AffiliateWP, you will be responsible for figuring out your tax obligations. Other third party services like ShareASale can handle tax reporting for you, but it comes with a higher price tag.
Regardless of which type of program you are using, there are a few things you are responsible for.
- Maintain a W-9 form for each affiliate in your affiliate program.
- Keeping track of the amount paid to each affiliate during the calendar year.
- Prepare and file 1099-MISC before January 31st.
- Must be filed with the IRS, the affiliate/vendor, and (possibly) any applicable states.
How businesses can handle IRS requirements
To make sure you are meeting the reporting requirements, put in your company’s affiliate policy that no affiliates will be paid unless a W-9 is on file.
In order to reduce paperwork, new affiliates can be asked to provide a W-9 as soon as they’ve earned their first commission. It’s easier to request the W-9 after they earned their first commission instead of when they first sign up. Not every affiliate will earn a commission, so you won’t need to track down their W-9.
What if you don’t file 1099’s?
For the 2017 tax year, penalties for late filing, failing to file, or providing an incorrect taxpayer ID number on 1099s for your affiliate marketing taxes can be pretty stiff.
- $50 per return if you file within 30 days of the due date, with a $532,000 maximum penalty. $186,000 for small businesses.
- $100 per return if you file between 30 days after the due date and August 1st. There is a $1,596,500 maximum penalty, or $532,000 maximum for small businesses.
- $260 per return if you file after August 1st, or fail to file returns. Maximum penalty is $3,193,000 per year, or $1,064,000 for small businesses.
- $530 per return if you intentionally disregard the filing requirements. There is no maximum penalty for intentionally disregarding filing.
As you can see, the costs of doing nothing with regards to your company’s filing requirements can be very expensive.