Key takeaways
- You are usually an independent contractor, not an employee. No tax is withheld.
- Report profit or loss on Schedule C and pay self-employment tax.
- Keep records. Deductions without proof can fail.
- General information. Check with the IRS or a tax professional.
How are direct sellers taxed in the USA?
In the USA, direct sellers are usually independent contractors. The company reports commissions on Form 1099-NEC once they pass the IRS threshold. You report income and expenses on Schedule C, pay income tax plus self-employment tax on your net profit, and often make quarterly estimated payments.
This is general information, not tax advice. Thresholds, rates and forms change. Check IRS.gov or a qualified tax professional.
The form flow
| Step | Form | What happens |
|---|---|---|
| 1 | 1099-NEC | The company reports commissions to you and the IRS above the reporting threshold (which has changed recently; check the current amount) |
| 2 | Schedule C | You list all business income and expenses; the result is profit or loss |
| 3 | Schedule SE | Calculates self-employment tax on net profit |
| 4 | Form 1040 | Carries the totals into your main return |
| 5 | Estimated payments | Quarterly payments if you expect to owe tax |
What you may deduct
- Inventory bought for resale, and samples for customers.
- Supplies, tools and apps used for the business.
- Mileage or vehicle costs for business trips, with a log.
- Shipping, fees and advertising.
- Training and events that are ordinary and necessary for the business.
- Home office, only if the strict use rules are met.
Products you buy for your own personal use are not deductible. Keep a clear line between the two.
Hobby or business?
The IRS looks for a genuine profit motive. A common rule of thumb is that an activity that shows a profit in three of five years is presumed to be a business. If it's treated as a hobby, income is taxable but expenses generally aren't deductible. Many direct sellers lose money in the early years, so keep proof that you're running it like a business: a separate account, records, and a plan.
An invented example
| Line | Amount |
|---|---|
| Commissions and retail profit | $7,000 |
| Inventory and samples | −$2,000 |
| Shipping, tools, mileage | −$1,000 |
| Net profit on Schedule C | $4,000 |
You'd owe self-employment tax on that net profit, and income tax at your rate. Many people forget the self-employment piece when planning.
Records to keep
- Every company statement and 1099.
- Receipts for inventory, shipping, events and tools.
- A mileage log with date, purpose and distance.
- A separate bank account or card for business spending.
Sales tax rules vary by state, and many companies collect it for you. For the wider US picture, see direct selling in the USA. For India's equivalent, see TDS and GST.
Frequently asked questions
Do direct sellers pay taxes if they don't receive a 1099?
Yes. All income is taxable whether or not a form is issued. A 1099-NEC is the company's report to the IRS, not a condition of owing tax.
What is self-employment tax?
It is the Social Security and Medicare tax that self-employed people pay on their net earnings, in addition to income tax. It is generally about 15.3% on most net earnings, subject to limits. Check IRS guidance for the current rules.
Can I deduct the products I buy?
Business expenses, including inventory you buy for resale and other ordinary and necessary costs, can be deducted on Schedule C if you keep proper records. Products used personally are not business expenses.
Sources
- U.S. Internal Revenue Service. www.irs.gov
- U.S. FTC Consumer Advice: Multi-Level Marketing Businesses and Pyramid Schemes. consumer.ftc.gov