Video: How to Report Affiliate Income with IRS 1099s Forms

How to Report Affiliate Income with IRS 1099s Forms
This should be you.

Scratching your head about how to report affiliate income with IRS 1099s forms?  Unsure about whether or not you potentially owe the IRS 1099 forms for your affiliate and influencer payments from the year before?

Relax, ‘cause our own CPA is here. Burt Douglas is gonna take you through the ins and outs of 1099. He’ll give you everything that you need to know about the IRS 1099 forms and your affiliate payments.

So away we go.

We’re gonna go through this pretty quickly, but you will know all of the key points in issuing 1099 miscellaneous forms by the end and how to report affiliate income with IRS 1099s forms.

Our Agenda on How to Report Affiliate Income with IRS 1099s Forms:

  1. The purpose of this form, so you understand a little bit more why the government is requesting this.
  2. The typical recipients who should be receiving it.
  3. The line by line detail on the form itself.
  4. Filing requirements.
  5. Penalties.
  6. A brief overview of the new Tax Reform Act. You’re probably hearing a lot about that right now. So we’ll cover some highlights that are affecting our individual and business clients.

The Purpose of The 1099 Miscellaneous Form

You’re probably reading or hearing a lot about the 1099 miscellaneous form. And if you have affiliate payouts you’re probably wondering how to report affiliate income with IRS 1099s forms.

It is a requirement.

The penalties are serious for not filing these with the IRS, but it is required for non-employee compensation for services. And I want to stop right here and emphasize on services.

You do not have to issue this if you’re buying products, or if you’re buying supplies or materials – it’s strictly for services. So if you have individuals or affiliate partnerships that you are paying money to, they will need to get 1099 miscellaneous if you pay them over $600 in a calendar year.

I’m also gonna show you how you obtain the recipient’s information that is gathered on a Form W9.

Important Tip For Reporting Affiliate Income

We recommend that all of our clients request that Form W9 right up front because once you pass that $600 threshold, that’s when the requirement kicks in. Many times, it’s difficult to go back and get the W9 after you realize that you’ve exceeded the $600 that you’ve paid the recipient. So I just recommend that you get that right up front.

W9

This is the W9, you should be sending this to all of your affiliates or anybody that you’re paying services to. And you can see right here what they will complete whether or not they’re an individual sole proprietor, C Corp as corp partnership or a trust. If they are a C Corporation or an S Corporation, you do not need to send them a 1099.

So we have a lot of thresholds that we have to go through, but that is one of the key thresholds. Make sure that they give you either their social security number that’s right down here or their federal ID number which is right in this section. And then all you have to do is keep that on file and you’ll use this at the end of the year when you prepare their 1099s.

Okay, the recipients and this is where we really need to discern who qualifies to receive one and who doesn’t. Again, it’s an independent contractor, consultant, or your affiliate partner. Your attorney, your IT support, any handymen.

Also keep in mind that by law, you are required to issue one if you pay a landlord for rents or if you rent your equipment or any other items, they must receive a 1099. And I’ll review with you on the forum where that information goes.

Again, it’s not needed when purchasing products, supplies, or goods. So let’s say that you bought a laptop computer from somebody and it was over $600, you do not need to issue them a 1099.

The 1099 Miscellaneous Form – Line by Line Items

And here is the form. You’ll notice that I did download the 2018 form. I think the IRS has finally approved this. As you all know, we’re in furlough right now, so it is a little difficult to get updated forms from the IRS. But this is the 1099 miscellaneous as we know what it’s going to look like.

Box Seven – Non-Employee Compensation

So if you pay somebody rents whether for a building, an office, or equipment, that information gets put on box one. And then if you have payments to your affiliates, to consultants, for services, that goes under box seven, non-employee compensation. You’ll notice that there’s a bunch of other boxes here. I’m not gonna go into them because they’re not gonna pertain to 99.9% of you, but you wanna focus in on rents and box seven, non-employee compensation.

Let me go also over the format, you’ll notice here, there this payer’s name, that is your name, your business that you need to include your address, postal code, telephone number, and then under here, see this it says payer’s TIN. It’s taxpayer identification number, that is your business’s number.

Important Warning

Please don’t put your social security number in there. I have a lot of eCommerce clients that don’t get a federal ID number and they really should. And they use their social security number on this. Well, what happens is now your social security number is out there in the…

The E word, the ether. And this is where a lot of people have lost their identity. And they have people stealing their identity. So don’t use your social security number, get a federal ID number and put that in there.

This is the recipient’s TIN, so your affiliate partner’s federal ID number or social security number will go here. The recipient’s name, address, city, state all of that and then complete box one or box seven. Again, if it’s an affiliate partner complete the box seven.

We just kind of reviewed the line by line detail – contact us to receive a copy of this PowerPoint slide deck. But this just outlines what you must include the pair’s information, identification numbers. This is why I highly suggest that you obtain that W9 from the person because that form will encapsulate everything that you need to include on the 1099.

Okay, reminder box one is for rents. I do have a couple of my clients that pay royalties. Those are outside of affiliate partner payments. If you have something like that, contact me and I’ll kind of walk you through it. Box three, other income. I had a couple of the eCommerce clients that give praises. If you do give a prize or some kind of compensation other than your non-employee compensation that would go under box three. And then box seven is your non-employee compensation.

Examples of Non-Employee Compensation

Examples of non-employee compensation would be professional services, referrals, non-employee, entertainers, directors, things like that. And again, box 14 is gross proceeds paid to an attorney. I don’t know why, but the IRS they do not trust attorneys.

They always wanna know how much money has always been paid to attorneys so they can track that. So even if the attorney is incorporated, this is the only exception. If the attorney is incorporated, you still have to send them a 1099. So that’s just something to keep in mind, again, if you have any questions about this shoot me an email or give me a call and I can walk you through this.

Filing Requirements

Okay, filing requirements. So I have a lot of questions on when all of these forms are due. So the recipient, your affiliate partner, or the person providing services for your entity they must receive their 1099 by January 31.

Now, it’s due January 31, if you drop it in the mail and it’s date stamped, post date stamped January 31, you’re good. So this obviously would be January 31, 2019, for the 2018 forms.

Now, we have a couple of filing dates that you have to keep in mind with the IRS. If you have non-employee compensation, that’s box seven. You must either e-file or paper file by January 31 to the IRS. If there is no non-employee compensation, in other words, there’s rants, prizes, things like that, you must pay per file by January 31.

If you e-file online, they do give you a delayed date up until March 31 to e-file. 

There’s a lot of software applications out there that you can sign up for and e-file all of your 1099 miscellaneous.

Also, if you’re using QuickBooks desktop or QuickBooks Online, they’ll be able to e-file all of your 1099 miscellaneous forms for you. So all of our clients that use QuickBooks or QuickBooks Online, that’s how they file their 1099s.

What to File

Okay, what to file. So you have two different forms that have to be submitted. If you’re doing this manually, you’re gonna have to manually complete these. If you’re e-filing it, typically, the e-filing software will complete this other trans middle form also called a 1096. It’ll complete that automatically.

Manually Paper Filing

If you were manually paper filing these forms, then you will need to get a red Form 1096 and complete it. What does the 1096 look for? And again, look like. And again, this is just a transmittal so you complete this 1096 and you attach it with all the 1099s before you mail it to the IRS.

So all of your information, you’re the filer, all of that information gets input here. You would then indicate your name or whoever you want to be contacted if the IRS has any questions. A telephone number, email, and then you’re going to include your employer identification number.

Again, there’s space for social security number, please don’t use your social security number because it gets out there in the…  Ether.

Don’t put it in the ether, everyone.

That’s how you get your identity stolen.

Indicate how many forms are attached here. And then you’ll notice down here there are all sorts of forms that you can select. The one that you’re gonna be selecting is right here under 1099 misc, miscellaneous, okay? They’ll sign it, date it.

Important Tip about Printing

Please make sure this form is red. If you download it from the IRS’ website and you print it on black paper or black ink, believe it or not, it will be rejected, and they will send it back to you. So they’re kind of finicky about their red forms. That’s why I strongly encourage you to go ahead and file this through your e-file software with QuickBooks Online or QuickBooks desktop.

Record Keeping

You wanna keep these documents and all of your bank accounts to document how much you paid your vendors or affiliate partners three years from the date of the return. So let’s say that you file the return on January 31st of 2019, ’20, ’21, ’22. You can actually destroy everything on February 1st of 2022.

The requirement is four years from the due date if there is a backup withholding requirement. And I’m not gonna get into that because most of your affiliate partners are not gonna require any mandatory withholding on the payments. But if you have somebody that you think may be subject to that, go ahead and let me know and I’ll walk you through the mandatory withholding.

Penalties

This is serious. It used to be that IRS would charge you $50 for every 1099 that you didn’t file and I had a lot of business owners that would just say, “$50. It’s gonna cost more to prepare the forms. I’ll just go ahead and pay the penalty”.

Well, now that every year the IRS increases these penalties more and more – we’re up to $530 per recipient. There is no limitation there.

I had a very difficult eCommerce client couple of years ago and they had about 20 affiliate partners and the IRS was gonna move forward and charge them the penalty. And back then I think it was $400 per recipient. And it was a battle to finally convince the IRS not to assess the penalty.

So I say just complete them at $530 a pop, you do not wanna get stuck with that and the IRS is getting very strict about this. They are no longer becoming lenient, so just keep that in mind.

Tax Cuts and Jobs Act of 2017

This is the new Tax Reform Act that everybody’s talking about. And I’m just gonna point out, most of the new rules went into effect January 1, of 2018. So it is gonna affect your 2018 tax filings.

Notable changes – so I’m gonna go over a couple of items that affect you individually, then I’m gonna get into the real meat of the matter which is a new tax code section that will reduce your tax liability by about 20%.

Reduction of The State and Local Tax

But let’s go over these notable changes for individuals. The Tax Cuts and Jobs Act, also known as TCJA, changed a couple of our itemized deductions. First of all the state and local tax, which is also referred to a SALT, the state and local tax deduction has been reduced. So even if your overall state taxes equal $12,000 in 2018, you’re limited to deducting only 10,000.

Now, this really affects our businesses in California, New Jersey, New York, the high-income tax states. If you live in Texas or Wyoming, Washington, Nevada, you’re still probably gonna be able to deduct your state and local taxes there.

Limit on mortgage interest. Just be aware, if you bought a home in 2018 and have a new mortgage on it, you might be limited to the amount of interest that you can deduct. Also, a big item, home equity lines of credit are no longer deductible.

Exceptions

Now, there’s a couple of exceptions to this. If you do an improvement on your home or I have a lot of eCommerce clients that borrow on their home, they get a home equity line of credit and then they use that for their business. We can still deduct it, but there are certain elections and additional filings that we have to do in order for you to deduct that interest.

Also, remember, we got each of us a $4,000 dependent deduction on a return. So let’s say that you were married and you had one child, you would qualify for three exemption deductions. And I think in 2017, each exemption deduction was about $4,050. Well, it terminated.  So the new tax reform, that reform act actually deleted any of those exemption deductions. So don’t worry about that as you move forward since you’re not gonna be receiving a deduction.

I’m just gonna mention this very quickly.

Depending on the age of your dependent, if you have children, depending upon the age and the amount of your income, you now may be receiving a credit for your dependents, and that’s anywhere from $2,000 to $4,000 per dependent. But again, there’s a lot of requirements, restrictions in order to qualify for those credits.

Section 199A – The Flow-Through 20% Deduction

Here’s the big one. This is the most talked about tax deduction that we’ve seen in my industry for probably 33 years. This will affect all of you. Section 199A is the flow through deduction. So depending on meeting various requirements and from speaking with Brett, all of your businesses will qualify for this.

I just have to worry about attorneys, actuaries, doctors, dentists, sometimes they don’t meet the requirement for the 20% deduction, but you will.

Depending upon your business, how it is formed, is it a partnership? Is it an S Corporation? You can now take a 20% reduction of your business income as a special deduction on your individual return.

So here’s an example.

Let’s say your business net income is $50,000, that’s net income after expenses, you may qualify for a $10,000 deduction on your individual tax return. So don’t let that slip by. That is a big change this year, and you wanna take advantage of it.

Flow Through Deduction Requirements

There are many requirements to qualify for the flow through deduction, that 20%. One of them and I’m not gonna drill down too deep on this area, but one of them is that you generally have to have wages. So let’s say that you’re a partnership, that’s a really good example, and you didn’t pay any wages because you have two partners.

We may run into some restrictions there as far as the full 20% deduction being applied on your individual tax return. But again, there’s a lot of requirements, a lot of restrictions. But don’t forget to look at that as you’re preparing your 2018 tax returns. That’s a big deduction.

How to Report Affiliate Income If You Hold Inventory

It also changed the requirements for reporting income if you hold inventory. I have a lot of eCommerce clients, some hold inventory, others don’t. But whether or not you hold inventory, they’ve actually changed the rules. Before the Tax Cuts and Jobs Act, if you had inventory, you may have been forced into reporting all of your revenue on the accrual method, accrual basis.

So the new Tax Reform Act came out and they said, “Look, if you’re under $5 million of gross revenues, now you may be able to elect the cash basis of reporting and that is much more favorable for business owners”. They now allow that even if you have inventory, but some of my eCommerce businesses just do drop shipping, so they really don’t take possession of their inventory. It comes directly from either another supply chain provider, or a channel partner, or somebody else.

Q & A

“When should you generate a 1099?”

Okay, so all of the information that has put on a 1099 is based on a calendar year. So you actually have to run the report from January 1, in this case, 2018 up through December 31, of 2018. And it’s based on the checks or cash. If you’re paying cash they don’t like that. But based on checks or cash that are paid to your affiliates or the service providers, you would add all of those amounts up and then you must file in January of the next year.

“If we pay less than $600, no filing?”

Yep, no filing, no filing. It’s only above $600.

So $600 is the thing.

Paying Affiliates by Credit Card

Now, here’s a little tidbit for you. Believe it or not, the IRS changed the rules in 2011. If you pay your affiliates by credit card, not by check, not by cash, credit card, you do not have to file a 1099 miscellaneous, okay? So that’s pretty cool. That just eliminates a lot of additional paperwork for you guys.

Here’s the problem, though. And I had a client, eCommerce client, business owner. He actually did some payments by credit card, other payments by check. That gets a little goofy at that point because if you’re using QuickBooks, QuickBooks only gives you one total. The total amount that you paid that affiliate partner or the service provider – it gets a little dicey.

What if we pay via PayPal?

The IRS regulations actually equate PayPal to a credit card. So your question is, “What if we use PayPal”? If you use PayPal 100% of the time to pay your affiliates or service providers, you do not have to pay or file the 1099 miscellaneous form.

So if you’re able to, I would pay with credit card.

Paying Vendors in Cash

But whenever you issue a check or pay with cash, I have some people that are still paying with cash, especially a lot of our cutting edge businesses here in California that are coming up, they’re totally cash-based. And I’m talking about marijuana and those types of facilities. Again, if you have that kind of a business and you are receiving cash, when reporting your affiliate income, you must file a 1099 miscellaneous for those vendors that you pay cash to.

LeadDyno Merchants

So to recap that from a LeadDyno user perspective, so you’re in good shape if you’re using the pay via PayPal shortcut within the app or PayPal mass pay. Those are gonna be our most popular ways to pay. According to Burt here, you’re gonna be in good shape as far as the 1099 requirement is concerned, even if you’re going above that $600 yearly threshold that we talked about.

Affiliate Check Payments

The case in which you’re gonna have to prep a 1099 is gonna be if you’re cutting a check, so that’s gonna be the manual pay button that we have. So if you’re still paying certain affiliates by check or you’re doing something else. I would assume Coinbase and Bitcoin might be some…

So different ways to do it there. In those cases, you’re gonna have to do the old 1099 for reporting income. So yes, to reiterate on the follow-up question.

“I paid all my affiliates via PayPal, I do not need to issue a 1099. How do I count for commissions paid for the year?”

So I assume we’re looking at within the QuickBooks type of framework. Then so if he’s paying via PayPal how are we gonna go ahead and what are we filing those? How’s that gonna get into the ledger? How are we categorizing those payments?

Okay. We’re talking about the PayPal payment for the affiliate. We pay our own affiliates via PayPal and then I myself categorized to commission payments typically.

Yeah, whatever category you wanna expense that too in your QuickBooks that makes sense to you guys, yeah, that’s fine. It could be to commissions, affiliate payments, I really don’t care.

But the most important thing is if you’re paying them with PayPal or credit card, you don’t have to worry about the 1099 filing requirements. But just be careful because, again, I have clients that do both, they’re sometimes using a credit card or PayPal, and sometimes with a check or cash. So just be consistent there.

“I came in late, is this going to be recorded?”

So, we did hit the record button as we went. All things go well, we’ll get it up on to our YouTube channel, we’ll get you an email later with a link to that recording. We’ll also do this again in a couple of weeks, so if you think of questions between now and then you’re welcome to hop on our second and final session. So that’s gonna be January 17, same time, so we’ll do it at 11:00 A.M. Pacific, 2:00 P.M. Eastern.

Final Remarks about The Tax Reform Act

Yeah, the only thing I would probably add on how to report affiliate income is in regards to the Tax Reform Act. I am getting a lot of questions for my eCommerce businesses. Again, there’s a lot of new items that benefit business owners, there’s new deductions, new credits, it’s really exciting.

I’ve been doing this gig for a long time and I haven’t seen this many changes in the tax reform or in the tax code since 1985. So this is really exciting for us who work with business owners because there’s a lot that we can actually do for our clients now as far as carving out all of these additional deductions and credits.

For follow up questions for Burt and his team:

Email Burt at burtd@yourcpateam.com

Jen’s a good resource for all sales at jennifer@yourcpateam.com

Their URL as well, yourcpateam.com

You can give them a call or send me an email mention that you were on the webcast today. They can give you a hand with any specific questions that you have.

So I wanna thank everybody for attending. Now you know how to report affiliate income with IRS 1099s forms.

I hope it was helpful to everyone joining.

Follow up questions on How to Report Affiliate Income:

As always, let us know if you have any more questions on How to Report Affiliate Income and, you know, from a LeadDyno perspective, we are online all the time. So at leaddyno.com, you can find us live chat, phone, email, we can also get you connected with Burt if you are interested.

So thanks again everyone, I hope to talk to you soon.

Other Related Articles

Actually, before I let you go, since you’re reading about how to report affiliate income, then perhaps you’d be interested in other articles related to affiliate income.

Here is a couple that we have previously published on our LeadDyno blog.

Using Affiliate Tracking Software to Track Affiliate Income

Pro Tips To Boost Affiliate Income On Your Blog

Okay, now that officially wraps it up. Now you know more on how to report affiliate income – please don’t get caught out and make sure you file your taxes in due time.

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