Many people who sell products through home parties do it for the discount it gets them when they purchase their own goodies. Others are dead serious about becoming one of the company’s top sales reps. How you see yourself is important at tax time, because your business goals are what determines how you should treat that income, and any money spent making those sales, on your tax return.
If your goal is simply to buy products at a discount, help a friend out by hosting one or two parties, to give a party just because your friend needs to sign a new sales rep up this week, or to become involved only for the pleasure and social aspects of selling a particular product, you must report all sales rep income as miscellaneous income on your personal tax return. According to IRS rules, you are engaged in a hobby that produces occasional income.
When your goal is not just to make a few sales, but to build a long-term business, to sign up new hostesses so that you can build your sales force, and you put a realistic business plan in place to accomplish your goals, you can report your income on the small business Schedule C tax form. Because you are acting in a profit-minded manner, according to current tax code, your sales efforts are considered to be a business operation. A business owner can write off expenses that exceed business income.
The IRS has home party sales reps grouped with other part-time occupations normally carried on as a hobby. Because of that, those who are operating as a business are prone to tax audits. But, that’s never a problem when you keep good records. A hobby audit is generally tossed out once you produce a solid business plan, well-organized financial records, and documentation of changes implemented to increase your profits.
A sales rep using the Schedule C tax form can write off all normal business expenses; when you engage in a hobby you cannot deduct more expenses than the income your hobby produces. Both are required to report inventory costs according to IRS laws, deducting only the items sold, carrying unsold inventory expenses into the following year.
Operating in a profit-minded manner will not only increase your sales, it will allow you to grow your business with pre-tax dollars. A self-employed sales rep can take advantage of the same tax laws big business owners use to buy equipment, home office furnishings, computers for use in the business, to further their business education and much, much more.
Understanding what the IRS expects of the independent sales rep is an important part of operating a successful small business. And, you’ll pay less tax.