In today’s gig economy, working as a direct seller or an independent consultant has become immensely popular. As per the report published by the DSA (Direct Selling Association), the United States recorded 7.7 million direct sellers (a 13.2% increase over 2019) in 2020 built a business full-time (30 or more hours/week) or part-time (fewer than 30 hours/week).
A direct seller’s income is based on their sales and not on the number of hours they work. Here, the services are performed under a written contract between the seller and the person for whom the seller performs the services. The contract serves as an assurance that sellers are not treated as employees for federal tax purposes.
As self-employed workers, direct sellers are required to pay estimated quarterly taxes using Form 1040-ES if their Federal tax liability is over $1,000 for the year.
The following article will brief you about quarterly estimated taxes, the sort of deductions you should be taking, the forms you will need, and any other additional information that might come in handy.
Quarterly taxes for direct sellers
Quarterly taxes or Estimated Taxes are meant for self-employed individuals, independent contractors, freelancers, gig-workers, or 1099 workers.
As an independent consultant, if you earn more than $400 annually, the IRS expects you to pay quarterly tax. Self-employment income includes any net profit from the activity subject to the 15.3% self-employment tax, which functions similarly as Social Security and Medicare taxes employees would have withheld from their wages:
- 4% for Social Security
- 9% for Medicare
These are the people who do not have taxes automatically withheld from their income, thus, they have to pay taxes to the IRS throughout the year on a quarterly basis. These taxes are used to pay:
- Federal Income tax
- State income tax
- Self-employment taxes
- Social security
- Medicaid/medicare
In addition to these, independent contractors also have to worry about capital gains taxes (both short-term and long-term gains) and AMT or Alternative Minimum Taxes for those earning over $100k annually.
Common deductions
Direct sales consultants can deduct ordinary and necessary business expenses, such as:
Advertising and marketing
As a direct seller, you can seek deductions for advertising or promoting your business.
Contract labor
As a direct seller, you may be required to hire someone on a contract basis. If they work on their own time, they won’t be considered an employee, so you can write off their wages.
Office expenses & supplies
Office expenses include anything that helps you run your business. Use of an app, software, subscription to a website, creating a website/buying a domain name, or anything else used for your business is considered a deductible expense.
Home office
The home office deduction is considered to be complicated but very beneficial. A home office can be considered a tax deduction as long as you use the workspace exclusively for your business. As a direct seller, you can apply for a home office deduction if you use a portion of your home to store the products/inventory and supplies.
Startup
Start-up expenses (capital expenses) are not deductible unless you, as a seller choose to deduct the expenses. If you are a direct sales consultant, you can deduct up to $5,000 in business startup costs and $5,000 in organizational costs. This includes your starter kits, fees paid to become a consultant, costs incurred while researching different companies, and training fees.
Mileage and vehicle expenses
To benefit from this particular tax deduction, you need to track your mileage. Any sort of distance that you cover with the use of your vehicle for your direct sales business, you can apply for the mileage deduction.
Other Expenses
Certain expenses don’t fit easily into the common categories. Some things that fall under this category include:
- Education expenses
- Licenses
- Postage
- Subscriptions to professional publications
- Cell phones if used exclusively for work
Forms required
As a direct seller, you can file for your taxes via Form 1040 Schedule C or C-EZ. The following represents the various forms of income a direct seller has to report:
- Sales
- Any incentives received for sales
- Accolades and gifts received from the selling business
- Products received for meeting sales quotas
You must report all income received on the tax return regardless of whether you received an information return, usually Form 1099-MISC is used for that purpose.
Calculating quarterly taxes
There are many different ways to calculate your quarterly taxes. Tracking the direct sales tax deductions can be tricky. You can rely on bookkeeping software or use FlyFin’s quarterly tax calculator, which serves as an expense manager to assist you with automating your quarterly tax payments.
The quarterly tax calculator allows you to track expenses and income on an “ongoing” basis, making your quarterly taxes effortless and accurate. It provides the most accurate quarterly tax calculations based on your income and deductions. It also gives you the option to file your estimated taxes directly with the help of a CPA without relying upon the IRS Schedule C Worksheet.
Paying quarterly taxes
As an individual contractor, you can pay quarterly taxes by filing Form 1040-ES. You can send estimated tax payments using one of the following payments methods:
- Electronic Federal Tax Payment System (best option for businesses or large payments; enrollment required)
- Electronic Funds Withdrawal (during e-filing)
- Same-day wire
- Check or money order
- Cash
Bottom Line
As a direct seller, you are bound to pay quarterly taxes. Instead of stressing over your receipts and bills, we recommend you try FlyFin. You’ll not only get to know the exact quarterly tax amount that you owe but also maximize your savings by applying for all the deductions you qualify for, as a direct seller.