Paying affiliates? Take the right steps to protect your business

Do you pay people as “affiliates” of your products or services after they’ve made a sale? That’s great – a good way to get your sales moving! Though you must be cautious and take the right steps if you ARE paying anyone. You are responsible for keeping a record of those commissions and claiming that you’ve paid those people by filing the proper tax documents.

Whenever you generate a sale for your own products, you claim it as income/revenue in your accounting process. After you’ve made the sale, there may have been an affiliate who “made” the sale for you and thus earned a commission. You would ethically record earning X dollars and paying out Y dollars from that X dollar amount, thus lowering your “profit”. In this case you would record paying that affiliate Y dollars as an expense, profiting the difference between X and Y.

At the end of the year it is important to file the tax paperwork for each of those affiliates to you can inform the IRS where that Y dollar amount went, and why you are not claiming it in your profits. So, why is this important? Imagine if you were audited or contacted by the IRS saying “Where did Y dollars go?” You’d then want to say “Oh, I gave it to so-and-so.” But if you didn’t fill out the tax documents at the beginning of the year, how will the IRS know?

In the case of not filing for those individuals…you’ve got a big problem on your hands. The IRS would hold YOU responsible for all those commissions, requiring you to pay taxes on them – yup, you would pay taxes on money that you didn’t end up claiming as profit.

Imagine paying out 100,000 dollars in commissions and having to pay taxes on them? That’s like throwing money into a fire.

Long story short…collect tax info from your affiliates before you pay them, and file the right paper work during tax season to save yourself a potentially devastating experience.

And, if you think the IRS will say “Oh sure, give us the names of those people you paid, we’ll hunt them down!”…think again.