Affiliate PayPal Taxes & Asset Protection Strategies
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Affiliate PayPal Taxes & Asset Protection Strategies

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As you may know, this year PayPal will start reporting the income received by many affiliates via the PayPal. While this is limited only to those who receive more than $20,000 in payment AND 200 transactions, it will affect many affiliates.  Please remember, however, while this law only requires that PayPal report these transactions, reporting all sources of income to the IRS is required by law.  This however raises a question about many affiliates method of both bookkeeping and reporting income, so I felt it was time to give some advice about bookkeeping techniques and more importantly how to save yourself a lot of money in taxes and work.

1)      Create a corporation. Seriously, if you are making more than a few dollars a month, you need to create a corporation.  I have used LegalZoom personally for all my corporations and highly recommend it. If you are going to do a corporation, the best State to incorporate in is Wyoming LLC (Limited Liability Corporation) . There are several reasons for this, but mainly because there is no state tax, no reporting requirements and even a foreign national (non US citizen) can own a Wyoming LLC.  If you set up a corporation, make sure you also get a EIN (Used for Tax reporting to the IRS) from LegalZoom.

2)      Get a bank account and do not use PayPal for receiving payments. One of the biggest issues with PayPal is that its costly for each transaction and it’s pain in the rear end to record each transaction and then the fee associated with the transaction.   The IRS will be getting a report on the total income you receive, so when you file taxes you will have to show the cost of the services.  Unless you account for each transaction and then the cost of the services in the transaction, you could be hit for additional taxes. Additionally, the more of a paper-trail that is required internally, the most risk of mistakes that will cost you money. Get people to wire or send you checks. It’s simple and you just record the payment in your books.

3)      Get QuickBooks for keeping all your books. It’s pretty simple for most affiliates, and if you use debit card for most transactions online and have a bank account, it will figure out most of your transactions, deductions and keep a great accounting. A little basic learning is required on how to use it, what categories are for what transactions and the such, but far worth your time if you don’t have a bookkeeper. If you are doing better, get a part-time bookkeeper to assist.

4)      Deduct anything you do for or related to business as a business expense. This will save you a lot of money, no doubt. This means that when you buy a computer, this is a cost directly associated with your business, as is all travel to conventions, supplies such as paper, software, you name it. Most importantly, if you are buying media, buying ads on Google this is an expense and you biggest expense (Cost of Goods Sold). You need to record everything that you do associated with your business, from lunches to travel.  A good credit card can help you keep track of this, but also so can a debit card.

While this is a short list, and definitely not all the advice that you need as an affiliate to make a business, it’s a good start. If you are making money, the worst thing you can do is to continue doing things the same way you were before making money. This is partially because the industry goes up and down – was just talking to an affiliate who now owns $2M in taxes to the IRS because he didn’t do things right.

Written by Pace Lattin

Pace Lattin is one of the top experts in interactive advertising, affiliate marketing. Pace Lattin is known for his dedication to ethics in marketing, and focus on compliance and fraud in the industry, and has written numerous articles for publications from MediaPost, ClickZ, ADOTAS and his own blogs.

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9 Comments

  • mark says:

    Can you deduct backlinking services and articles?

  • Wes Downey says:

    We use Paypal for our payment processing on a few sites and see no problem with the fees or reporting the income from it. If you ever get audited and they ask for your Paypal records even before they began reporting the income to the IRS, you are going to be forced to show them money you made. If this wasn't on your income taxes, they are going to apply some heavy fines and penalties. I don't really see the Paypal change as anything that would need to change my business. The fees and income are easy to report at the end of the year. You just download a csv file of all the transactions and sort/add up the columns.

  • Shari says:

    Thank you for the very useful information. I will keep that in mind as we are just starting out. Thank you for posting and keep on posting. :)

  • Rick Lea says:

    Great advice and I totally agree. Definitely sucks that our government is desperate for money. I think Paypal should not report, just my opinion.

  • John R. says:

    We do approx. 1.5m through PayPal each year and booking all those transactions is a huge a pain. After spending 3 days searching for a solution I came across a service called SimplePort. After you set up Quickbooks to communicate with their software, transactions are brought in automatically and booked to the proper accounts. It's real easy to use and keeps you in check with the IRS. If you aren't familiar with QB the setup could be a bit tricky but most can figure it out and their support is top notch. Hope this helps.

  • La Bella says:

    Hi Pace
    Account keeping is just common sence, record what you spend and the income you make.

  • Normally I wouldn’t rant as I’m about to, but the lazy responses (just keep proper accounts, etc.) to the authors thoughts and ideas got me fired up, so hear ye go…

    It seems like everyone but us Americans realize just how sick, demented, intrusive… and TOTALLY illegal and unconstitutional the IRS is. Yes, that’s right, I said it… illegal and unconstitutional… and with an education and background in law and finance I give that comment full weight and assert is as absolute fact.

    It’s shocking how often I see and hear that more unlawful intrusions are simply shrugged away… frog’s in boiling water. Everyone’s sleeping it seems. Oh well, people will be sheeple, most of the time.

    Unfortunately things are only going to get more and more difficult in the US as all levels of government scramble to access cash they need to operate governments that have consistently run deficits for decades.

    What’s worse is that not only are governments creating countless more bureaucracies to watch, tax and harass the citizens, but they’re giving them unconstitutional “authorities” via unlawful policies within that no one seems to question.

    Get your excess capital (legally) offshore asap… might want to move your body there some day as well.

    Best, James

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