Organize Your Direct Sales Finances and Prepare for Taxes (2024)

1) Gather your 1099-NEC forms

2) Gather your 1099-K forms

1099-K forms are sent from payment processors like Square or PayPal if you have over $5,000 in sales (this will soon be changing to just $600 in sales). They are also mailed by January 31st.

3) Generate a profit and loss statement

A profit and loss statement (or P&L) sounds like a fancy form, but it is really quite simple. The top of the form has all your income and the bottom has all your expenses. Then you subtract your expenses from your income to figure out your profit or loss. OurIncome and Expense Tracker helps you make a profit and loss statement and categorize your expenses to help with tax filing. Or if you are using accounting software like Direct Sidekick, you will be able to generate a P&L using the Reports function in the software.

4) Calculate your end of year inventory

You are required to report the acquisition cost (amount you paid) of your inventory for taxes. This can end up being tricky to figure out for a lot of direct sellers because the cost of your inventory likely fluctuates. Some inventory you purchase at a discount off the retail price. And some you probably get as hostess rewards for free or a different discounted amount. Then some items are even gifted to you as a perk from your company. How are you supposed to know how much you paid for the inventory you have left at the end of the year? We calculate the cost of our inventory by first determining what the retail value is of the inventory we have left at the end of the year. We then multiply that by the average percentage discount we pay for product. Between the free, discounted and regular price items we keep on-hand for vendor events and local in-person sales it averages out to paying about 20% of the retail price for our inventory. For example, if the retail value of our inventory is $1,000 the acquisition cost of that inventory is estimated to be $200 ($1000 * 0.20 = $200).

Tip:

Maybe you only have one or a few products you sell and keep on hand. And maybe the cost of the product is consistent every time you purchase it. If this is the case, you may know exactly how much you paid for your inventory and can report that amount. In our case there is a catalog of hundreds of items and the cost of the items vary so we use this average cost method. Whatever method you use to determine the cost of your inventory, make sure you are consistent and continue to use that method going forward.

5) Fill out your mileage log

Finish filling out that mileage log you were keeping throughout the year so you know how many business miles you drove last year. If you are using software like TripLog to automatically track your miles you should be able to download a summary report that will show you how many personal and business miles you drove during the year.

6) Gather your home office expenses

To be eligible for the home office deduction at least one of the following must apply:

You exclusively and regularly use part of your home as your principal place of business
You exclusively and regularly use part of your home as a place where you meet customers
You use part of your home on a regular basis for storing inventory or product samples

If you are eligible for the deduction the expenses you will need to gather are:

Direct expenses – These are expenses exclusively for the home office and are fully deductible. Examples include things like repairs and maintenance only in the office (fixing a light, etc.)

Indirect expenses – These are expenses that apply to the whole home and not just the home office. You will only be able to deduct a portion of these expenses. Examples include:
- Rent (if you do not own your home)
- Mortgage interest and property taxes (if you do own your home)
- Utilities (gas, electric, etc)
- Insurance
- Home maintenance expenses for the entire home (pest control, cleaning fees, etc.)

The amount you get to deduct on indirect expenses is calculated based on the percentage of your home that is used for your home office. So if your home is 1000 square feet and your office is 50 square feet and you use 50 square feet for storing inventory, the total square footage used for your home office is 100 square feet. The percentage of indirect expenses you will be able to deduct is 10% (100 sq ft / 1000 sq ft = 10%).

7) File your taxes

Most direct sellers run their business as a sole proprietor. By default, once you have any income from business activities according to the IRS you are a sole proprietor. Your business income and expenses will get reported on Schedule C and your profit or loss will roll up to your Form 1040. Your profits from the business will be subject to self employment tax so it is important to set aside money throughout the year to cover those taxes. The amount you need to save will vary by state but a typical recommendation is to save 25% of your profit to cover taxes.

Remember those 1099-NEC and 1099-K forms we talked about? Your business income should add up to the amounts reported on these forms or more. The IRS gets a copy of these forms so they know your business generated at least that much income. If you report a lower amount the IRS will likely reach out to you with an inquiry to figure out why. No one likes the IRS getting all up in their business so make sure report your income accurately!

For a while we did our own taxes using TurboTax Home and Business. It walks you through a lot of simple questions and fills out all the necessary tax forms for you based on your responses. For anyone that wants to file taxes themselves I highly recommend giving TurboTax a try. Now that our business has evolved, grown and become more complex we outsource tax preparation to an accountant.

Do you have any other tips or recommendations? Let us know in the comments below!