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.