How are affiliate commissions taxed?

Affiliate commissions are usually taxed in two ways. They are income, so the affiliate normally pays income tax on them in the country where they live. They are also payment for a service (promoting the store), so a sales tax such as value-added tax (VAT) or goods and services tax (GST) can apply too. The store usually treats commissions as a business expense, and some countries also require it to report commissions to the tax authority or to withhold part of each one, meaning hold it back and pay it to the tax authority instead.

What you will learn

• How income tax usually applies to commissions, for the affiliate and for the store
• How sales taxes such as VAT and GST usually apply to commissions
• What changes when the store and the affiliate are in different countries
• How to look up the rules for the countries you work with

Income tax on affiliate commissions

For the affiliate

In most countries, commissions count as taxable income for the affiliate, usually as business or self-employment income, sometimes as "other income". Residents are generally taxed on their worldwide income, so commissions from a store in another country usually count too. Many countries also charge social security contributions on self-employment income, and some offer simplified regimes for small sole traders. The affiliate is normally responsible for declaring the income on their own tax return.

For the store

For the store, commissions are usually a deductible business expense, like any other marketing cost. Some countries add duties on top:

• Reporting: the store may have to report commissions paid to individuals to the tax authority. In the United States, for example, this is done on Form 1099-NEC once payments pass an IRS threshold (see Do affiliates get 1099 forms?).
• Withholding: some countries require the store to hold back part of each commission and pay it to the tax authority on the affiliate's behalf. This withholding tax is more common when the affiliate lives in another country, and a tax treaty between the two countries, an agreement that prevents the same income being taxed twice, can reduce or remove it.

Sales tax, VAT and GST on affiliate commissions

Many countries charge a consumption tax, a tax added to the price of what is bought, on services as well as goods, under names such as VAT, GST, or sales tax. Because an affiliate sells a promotion service to the store, the commission itself can be subject to that tax.

When the store and the affiliate are in the same country

An affiliate who is registered for VAT or GST usually has to add it to the commission invoice. Many countries only require registration above a turnover threshold (a minimum amount of yearly sales), so small affiliates often do not charge it. A registered store can usually reclaim the VAT or GST it pays on commissions as input tax, the tax a business deducts from the tax it owes on its own sales.

When they are in different countries

Services sold to a business abroad are often zero-rated (taxable, but at a rate of zero, so no tax is added to the invoice) or outside the scope of the affiliate's local VAT or GST (not covered by that tax at all), so the affiliate usually does not charge it. Instead, many countries make the store account for the tax itself under a reverse charge, where the business buying a foreign service calculates the tax as if it had charged itself. In the European Union, for example, cross-border services between businesses are generally taxed in the customer's country.

Commissions do not change the sales tax the store charges its customers on its own products. That depends on what the store sells and where its customers are.

Look up the rules for your countries

Choose the store's country and the affiliate's country in the tax explainer below. It shows four short explainers: income tax and sales tax for the affiliate, and income tax and sales tax for the store. Each result links the tax authority and the sources behind it. Rules change and individual situations differ, so confirm with the tax authority or a qualified tax professional before acting on them.

For how Simple Affiliate pays affiliates, including which payouts it facilitates U.S. tax forms for, see the Simple Affiliate FAQ.