Paying Affiliates: Do I Need to Issue a 1099?
Having an affiliate program can be a double-edged sword. On the one hand, you gain the power of having hundreds or even thousands of commissioned sales people all promoting your product. But on the other, you have to deal with the tracking and bookkeeping. And come tax time, that means staying in the good graces of the Internal Revenue Service.
How the IRS Defines an Affiliate
Before we delve too far into the various forms of affiliate payments and what level of reporting you’re responsible for, let’s take a minute to talk about how the tax man sees affiliates. Since your affiliates aren’t employees, you’re not expected to withhold taxes from their payments. Much like a subcontractor (your VA, for example), you simply pay the agreed-upon amount, and he or she is responsible for his or her own tax reporting.
But there is a catch.
Not only does the IRS want to know from the affiliate how much he or she earned, but they also want to know from the vendor (that’s you) how much he or she paid to each affiliate. That’s where form 1099 comes into play – but only if your affiliate meets certain criteria.
When is a 1099 Required?
On the surface, it’s pretty easy to determine when to issue a 1099-MISC. If you pay a subcontractor (or affiliate) more than $600 in a single calendar year, a 1099-MISC is required. The only exceptions to that rule are if you and/or your affiliate do not live in the United States, or if your affiliate is a corporation. Sole proprietors, LLCs, and partnerships are all subject to the 1099-MISC rule, provided the $600 earnings threshold is met.
The PayPal Gray Zone
Beginning with the 2011 tax year, the IRS passed a law saying that any “payment card organization” must begin reporting earnings in excess of $20,000 on form 1099K, if those earnings were as a result of at least 200 individual transactions. A “payment card organization” is any company that handles electronic transactions, such as PayPal or your credit card processor.
What that means for a lot of affiliates is that they are potentially being reported twice – once by you, on a standard form 1099-MISC, and once by PayPal, on the new 1099K. You can see how this could cause some confusion, not only on the part of the vendor, but on the part of the IRS as well.
To 1099 or Not?
If your affiliate lives in the United States and earned more than $600 in commissions during the year, he or she needs a 1099 form. The only question is, should that form be issued by you or PayPal? Since you can’t possibly know if the affiliate meets the threshold for receiving a 1099K from PayPal, it seems reasonable that you should in fact issue a 1099-MISC. As with all things involving taxes, however, it’s probably best if you seek the advice of a qualified tax professional, rather than risk getting into hot water over missing or incorrectly filed forms.