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.
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
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 (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.
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.
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!