US tax reporting deadlines are approaching… are you ready?
Now that you’ve settled back into the office after your New Year’s holiday celebrations, it’s time to start considering tax reporting that you will need to take care of in the upcoming weeks.
If you are running a multi-vendor marketplace with vendors in the United States, you may have additional tax reporting requirements on top of your usual income, payroll, and sales taxes.
The sale of digital products on behalf of a vendor, for Federal tax purposes, are typically considered to be royalty payments. Those digital products can be anything from photographs, videos, music, PDF documents or e-books, WordPress plugins or themes, fonts, mobile apps, desktop software, and more.
Royalty payments over $10 paid to a vendor during the year is required to be reported on IRS form 1099-MISC.
Note: A common misconception is that only payments totaling $600 or more to an individual are reported on 1099-MISC. While this is true for many types of payments, the threshold for royalty payments is only $10.
What does this mean for store owners?
If you own a multi-vendor marketplace where you are selling digital products on behalf of your U.S. based vendors you may need to report payments to your vendors on IRS form 1099-MISC.
In order to fill out a 1099-MISC, you will need some information up front:
- IRS form W-9. The W-9 is a form that your vendors use to provide you information needed to complete their 1099-MISC forms. Information provided on this form includes their name, the type of entity they are (i.e. individual, LLC, corporation, etc.), street address, and taxpayer identification number. Pro tip: It’s good practice to request this information when bringing on new vendors so you don’t have to scramble for it at tax time!
- Verify W-9 information. Before filing a 1099-MISC, make sure you verify that the information provided to you is accurate, because there are penalties for filing with an incorrect name or taxpayer identification number. Your accountant should be able to assist with this. You can also verify it directly through the IRS, or through a number of third party services.
- Your business’ tax information. This should be fairly straightforward. You will need your business name, address, phone number, and Federal tax identification number.
- Total amounts paid. You must total all payments to your US based vendors during the year. This can be a tedious process for many store owners, especially if you have a lot of vendors. Fortunately, there is a plugin called WP1099 that will connect to your shop and provide you with an export of all the payment information that you’ll need for the year.
Filing deadlines
If you are only reporting royalty payments to a vendor, the deadline is February 28, 2018 if paper filing. Or April 2, 2018 if filing electronically. Certain other types of payments may require 1099-MISC to be filed by January 31, 2018.
In addition, your vendors should receive their 1099-MISC copies by January 31, 2018. This is to provide them with sufficient time to file their own income tax returns, which are due in April.
Failing to file by the deadline can result in fairly significant financial penalties from the IRS.
Paper filing versus electronic filing
Paper filing
You must be filing fewer than 250 forms in order to be eligible for paper filing, so for higher volumes, paper filing is not an option. In order to paper file, you must request special copies of the 1099-MISC form from the IRS. When you paper file, the IRS requires a special paper version that you can only get through them. This is so their scanning system can read the form correctly. It also uses thin carbon copy paper, so your typical laser or inkjet printer will rip the paper while printing. Filing a paper version requires an old-fashioned typewriter or special printer.
The IRS also requires an additional IRS summary form 1096 to be filed for anyone who paper files.
Electronic filing
Electronic filing (e-filing) has a lot of benefits over paper filing.
For starters, the IRS summary form 1096 is not required for e-filing, as the summary is done for you when you upload your e-file. One less form to worry about!
You can upload one bulk file that contains all of the 1099-MISC information as opposed to preparing each form individually, which will save processing time. You also receive a confirmation when the form was received and processed.
Additionally, the majority of states participate in what’s called the Combined Federal/State Filing Program. This means that when you upload your 1099-MISC e-file to the IRS, they will automatically file with your state’s taxation agency. Check to make sure your state participates in this program. If not, you may still need to file with them separately.
Sending 1099-MISC to vendors
You can choose to send an electronic PDF version of the 1099-MISC to your vendors, or mail a paper copy to them. Many companies prefer sending a paper copy to vendors to avoid the electronic version being caught in a spam filter.
If you choose to send an electronic version, your vendors should be able to give their consent to receiving the electronic version. If they choose to not receive the electronic version, they must still be able to receive a paper copy.
Additional considerations
As with any tax advice you read online, I couldn’t possibly cover all tax situations. Consequently, you will want to check with a local accountant to see if there is anything else you need to consider.
Filing deadlines and required forms may vary from state to state. Your accountant will be able to help determine what and when you need to file.
Your accountant will also be able to help you file the 1099-MISC forms and verify that all the information provided to you by your vendors is correct.
Next steps?
Tax time is here. Here is a list of things to do to make sure you are prepared.
- Make sure you get a completed W-9 form from all US based vendors. If you’re a US company with foreign vendors, they will need to fill out a W-8BEN instead. The IRS may audit this information, so be sure to keep it on file.
- Identify which vendors have been paid $10 or more during the year. WP1099 is a WordPress plugin that can do this calculation for you in just a few clicks by exporting all vendors and the total amount paid during the year in an e-file friendly format.
- File your 1099-MISC with the IRS, your state tax agency (if required), and your vendors. For a small fee, a local accountant can file the 1099-MISC forms for you. A good accountant will double check everything for you, which gives you peace of mind. You can also use a number of third party e-file providers, or file directly with the IRS.
Tax time doesn’t have to be stressful. If you find yourself feeling unprepared, use these tips to get yourself back on track. You’ll thank yourself at this time next year too!
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Thanks for insightful post. Is 1099 required if payments are made with credit cards or PayPal?
On IRS website and in accounting softwares, it’s advised not to report payments made from these channels. I guess that’s to avoid double income reporting.
Here’s the screenshot:
https://cloudup.com/cPqVLEhbvLv
Could you please advise?
Hi Sujay,
The 1099-K form is separate from the 1099-MISC.
Here’s a quick overview of each:
1099-K is a form that is provided by payment providers to the store owner. So for example, PayPal or Stripe will issue a 1099-K to EDD (if those are the payment providers EDD uses).
1099-MISC is generally issued from a business that pays non-employees for something. This can come in many different forms. Here are a few examples:
– If you hire a copywriter and pay them $600 or more during the year, you are responsible for issuing them a 1099-MISC to report the income they earned.
– As described in this post, if you have a multi-vendor marketplace and sell items on behalf of third parties, you’ll eventually pay them a commission. If that commission totals $10 or more during the year, you are responsible for issuing a 1099-MISC to report the income they earned.
– If you have an eCommerce store with an affiliate program, and you pay an affiliate $600 or more during the year you’ll be responsible for issuing a 1099-MISC to report that income as well.
So, using the EDD example from earlier, EDD as a company will receive a 1099-K at some point from their payment processing companies (Stripe, PayPal, etc.). But EDD should be issuing 1099-MISC to their affiliates who earn $600 or more during the year.
Does that answer your question?
To further clarify, the section in the screenshot you shared means that the payment processing company shouldn’t issue EDD a 1099-MISC. They should issue a 1099-K instead.
Thanks Scott. I’m still a bit confused if 1099-MISC filing required if we’ve paid our affiliates through PayPal.
The IRS website says:
“Credit card payments must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.”
QuickBooks Help article says:
“If you made any payments to contractors by credit card, debit card, gift card, or a third-party network like PayPal, you must exclude those amounts from your 1099-MISC forms. Instead, the IRS requires payment settlement companies to report those amounts.””
Here are couple of other articles:
– https://smallbiztrends.com/2015/01/1099-contractors-paypal-credit-card.html
– https://mirandamarquit.com/what-i-wish-my-clients-knew-about-the-paypal-1099-k/
I understand sending 1099-MISC wouldn’t hurt. But is that a requirement? If it’s not a requirement, why should we take efforts to implement systems to request W9 forms, filing 1099-MISC, etc. One less thing to worry about, right? 😉
Thanks for your insights..
These things are obviously a grey area, and seem to be a case where congress passed a law without thinking it all the way through (gasp, that happens?!?!)
I would still suggest that you do the 1099-MISC regardless of how the vendors were paid. Simply because there are substantial penalties to you as the business if you do not file them. On the flip side, there is no penalty for filing when it wasn’t required.
When in doubt, check with your accountant who should be able to dig deeper into your particular situation and offer the best advice for you.
Hi Scott,
On another tax-related note, EDD doesn’t currently support county or city-based sales tax calculations, which rules out charging proper sales tax in most US states (i.e. it’s impossible to charge legal sales tax rates in most of the US). Sooo…I’m thinking that if most of the US vendors aren’t worried about charging proper sales tax, they might not be worried about other tax-related things like royalty 1099s.
As a vendor looking to start using EDD, I’m surprised and concerned that EDD has such a large US market share when they don’t support US sales tax calculations. I opened a pull request on EDD back in October (https://github.com/easydigitaldownloads/easy-digital-downloads/pull/6071) so that I can use a filter to do proper sales tax calculations, but so far EDD hasn’t merged it.
Further expanding our tax calculations feature set is on our very near todo list.
Note: your PR is milestoned for the next minor release.
That’s terrific!
Sales tax calculations in the U.S. are unnecessarily complex. The fact that they’re usually destination-based (i.e. the buyer’s location determines the tax rate), and the fact that they’re often county-based means that it’s just a pain all-around. To make matters worse, one ZIP or city can be cut in half by two counties—so even ZIPs aren’t reliable for determining tax rates. The only way to know what county—and thus what tax rate—a user is in is to look at their entire address. Phew!
Given those complexities, the only reliable solution I’ve found to online sales tax calculations is TaxCloud (https://taxcloud.com/), I’d be happy to know if others have figured out another solution.
There are official TaxCloud integration plugins for many—if not most—popular e-commerce platforms (here’s WooCommerce’s: https://simplesalestax.com/). I’ve actually been working on a plugin that would add TaxCloud support to EDD (and crossing my fingers and hoping that you merged that PR, without which a TaxCloud integration is impossible).
Anyways, all that to say, I’m super pumped to hear that you plan to merge that PR! Thanks a ton for doing that, and also for taking the time to respond to my comment!
Pippin,
Glad to hear that this is on the radar!
Pete,
I wouldn’t say that US vendors aren’t worried about charging sales tax (they certainly will be if they end up in trouble for not collecting it). But I do think that there are a few a problems with sales tax in general.
1) A lack of uniformity in tax laws. Some states do not tax digital products at all. Others do if they fit a certain definition. Some cities and counties charge different rates on top of a state tax. Do you collect tax on all digital sales, or just when you sell to someone in your state? Can tax be included in the price, or does it have to be a separate line item?
There’s no single answer to any of those questions – everywhere is different. Clear as mud, right?
2) A lack of education on tax issues. This isn’t to say that the business owners aren’t educated. It’s the fact that running a business is a lot of work, and reading up on all the crazy tax laws mentioned earlier doesn’t always fit into a business owner’s schedule. They may start looking into it, but then something else demands their attention, and it gets put on the back burner. I’m definitely not saying that’s the right approach, but I’m sure it happens.
Posts like this one will hopefully shed some light on the requirements that a business owner may have to deal with, and help guide them into compliance if they’re not there already. I tried to put it in as simple language as possible without diluting the requirements. It’s not an easy task when trying to translate government-written instructions though 🙂
While not the topic of this post, but in the spirit of informing the user, here are a few links to sales tax related articles that may help:
https://www.avalara.com/learn/whitepapers/identification-taxability-of-digital-products/
https://blog.taxjar.com/sales-tax-digital-products/
https://quaderno.io/blog/sales-tax-digital-products-us/
Hi Scott,
Thanks for your reply! In looking at my previous post, I realize that I wasn’t properly appreciative of the effort that you put into this terrific post about royalties. I’d like to correct that mistake now and say THANK YOU! You’re totally right that tax laws are very confusing, and posts like this are super helpful.
The fact that sales tax laws are so complex makes solutions like TaxCloud SO much more viable. Using TaxCloud, you can assign TICs (i.e. tax categories) to each of your products (for example, 30050 for Download of Pre-written Software). Then, when TaxCloud is figuring the rate it can literally go through your cart and figure out the exact proper sales tax rate based on the origin address, the destination address, and the items in the cart.
They can even *file and pay* all of your sales tax for you, if you choose to use that feature.
It can really be a lifesaver.
Anyways, thanks again for your great article, and for your response to my comment!
Hi Scott,
Thank you for very useful post!
I am happy that on EDD site I can find these kind of information.
I would have one question though.
a) I believe that it is mandatory to filling a 1099-MISC and sending 1099-MISC to US vendors also for business which resident in EU (does not have any nexus in US), right?
b) If yes, then what would be “Federal tax identification number” for filling IRS? Do I have to register business with IRS or should I use EU VAT ID? I could not find this information.
Anyway not only in US are taxes complex and not consistent between states, we do have similar issues in EU 🙁
Thanks in advance!
Hey Simon,
That’s a great question, and I’m glad you found the post useful!
I don’t know enough about your particular business situation, so I can’t say for certain whether or not your need to file in the US. You can check with a tax expert in your area who is knowledgeable with US tax laws.
If you find that it is required for you to file 1099-MISC forms, you can apply for an Employer Identification Number, which will be used on the 1099-MISC. More info on that can be found here: https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein