What Does It Mean To Be An Indepdent Distributor In Network Marketing?

Posted in Blog, Direct Selling Editorials | 3 Comments

Daily I read or hear from network marketers confused on the legal meaning of “Independent Distributor.” The big question most former and current distributors ask is “if I am an independent distributor, then why can’t I do things as I want, like share my income or talk to my downline about a different direct selling opportunity?”

This confusion comes from the fact it is common knowledge that distributors own their own business. What most distributors seem to overlook when they sign the policies and procedures is the fact “they are independent contractors (distributors) for Tax Purposes!”

In 1986 the Direct Selling Association lobbied the U.S. Congress to add a specific clarification to the U.S. Tax Code exempting direct sellers by classifying them as Statutory Non-Employees aka Independent Contractors.

This was a great advancement for both the direct selling companies and the field force. It saved potentially millions in employee taxes for the companies, and allowed millions of home based business owners to start saving even more on their taxes.

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Another issues I think which causes some confusion is the fact critics seem to feel that Network Marketing and MLM are not part of direct selling, and is somehow not covered by the same laws and regulations which govern and protect other direct selling companies. This is flat out false! And with a little investigation on their part, they would see the the terms network marketing and MLM are not synonymous of each other. Both do get mingled together as marketing terms, however Dr. Keith Laggos explains in his college text book “Direct Sales an Overview” that both are terms to describe two different but similar compensation structures (although the IRS only references network marketing as another term for MLM” when describing the two types of direct selling companies.

If you desire you can read the full article on the Internal Revenue Service website (Click Here).

Types of Direct Selling Companies

“There are two types of direct selling companies – single level marketing (SLM) or multilevel marketing (MLM). Single level marketing (SLM) companies reward direct sellers for their own personal sales activity. SLM direct sellers cannot take on other distributors or sales representatives. Income comes from commission or bonus on sales.”

So, we see here that MLM aka Network Marketing companies are direct selling companies. And the independent distributors are governed and well as protected by the above mentioned U.S. Code.

Now, with that said, it might be wise to also see what the IRS has stated about independent sales representatives who market for the direct selling aka MLM aka Network Marketing company.

In a multi-level marketing company, sales representatives are able to sponsor other distributors or sales representatives and receive a commission or bonus on the sales made by their underlying resellers. This recruitment of down liners is necessary to increase a sales representative’s sales force and thus generate a greater number of sales. MLM’s are often referred to as network marketing companies. (Click Here to read the full article)

So, although for tax purposes the sales force of a network marketing company is classified as an independent contractor, outside of tax purposes, each distributor is bound by the policies and procedures and any side agreements they sign as governed under civil contract law.

For additional information governing the taxation of Direct Sellers please review Tax Tips for Direct Sellers.

The Following is for you to download and save for future reference on 26 United States Code 3508 Treatment of Direct Sellers:

U.S. Tax Code Governing Network Makreting, Direct Sales, MLM