DIRECT SELLING- COMMISSION AGENT, INDEPENDENT RESELLER OR EMPLOYEE?- TAX RAMNIFICATIONS
Direct selling organizations sell products to the public through their distributors. The distributors may purchase the products and sell them at a marked up price or sell them on behalf of the organization for a commission. Distributors might also sponsor other distributors into the organization and teach them how to sell and sponsor. These other distributors are downliners. Distributors are normally independent from the direct selling organization.
When
you set up as a distributor for a direct selling company you fall into one of
three categories: commission agent,
independent reseller or employee. The
first two types of distributors are normally self employed but there are
important differences in their tax treatment.
The tax rules for employees are entirely different from the rules for
self employed people.
The
first step in working out which tax rules apply to you is to establish whether
for tax purposes you are in business.
If you’re in business for yourself then you are either an independent
seller or a commission agent. Employees
are not in business- their employers are.
As
far as the income tax rules are concerned, you are in business if the nature of
your activities is business-like and indicates an intention to make a profit.
If you only products for yourself or as gifts for others and have no
intention of making a profit from selling those products then you’re not in
business.
It’s
important that you know exactly what your status is with the direct selling
organization so that you know which tax rules affect you.
The table below shows the most common relationships between direct
selling organizations and their distributors and briefly describes their tax
obligations:
|
If
you….. |
If
you….. |
If
you….. |
|
Earn
a salary or wage from the direct selling organisation |
Are
paid solely on a commission basis for products you sell. |
Buy
products from the direct selling organization at wholesale prices and sell
them at retail prices |
|
|
|
|
|
Then
you are….. |
Then
you are….. |
Then
you are….. |
|
An
employee |
A
commission agent |
An
independent reseller |
|
|
|
|
|
So….. |
So….. |
So….. |
|
PAYE
and ACC earner premiums are deducted from your wages.
You cannot claim expenses. |
Withholding
Tax is deducted from your payments.
You must pay ACC premiums and may have to register for GST.
You can claim expenses if you are in business. |
You
must pay your own tax and ACC premiums. Your direct selling organization does not deduct tax
from payments to you. You
may have to register for GST, and you can claim expenses |
|
|
|
|
|
And…. |
And…. |
And…. |
|
You
may have to file an IR5 Tax Return if your total income is from wages,
dividends and interest, and you will have to file an IR3 Tax Return if you
have other rental or business income |
You
will have to file on IR3 Income Tax Return (plus IR7 if business is
partnership, IR4 if business is company) |
You
will have to file on IR3 Income Tax Return (plus IR7 if business is
partnership, IR4 if business is company) |
If we can assist further, please email TotalAccounting as follows:
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