A few tax related questions.

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RyanMcC

A few tax related questions.

Post by RyanMcC »

I don't get to learn much of practical use on Quatloos, so I figured I would ask a few questions that may be useful to me/others in the future.

The only tax forms I have any experience filling out would be a 1040, a Schedule C, and Schedule SE. There are atleast 2 questions at the moment that would be helpful to me to clarify, feel free to address or ignore any issue you wish:

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EIN - There are a number of internet affiliate programs that I would like to join but many ask for a tax id number. Needless to say I would prefer not to use my Social Security number, so I assume I would want to get an EIN.

How long does it take to get an EIN? Does it in any way change the way I would need to do my taxes at the end of the year (the way I fill out a Schedule C or 1040, or if there are other forms that would have to be done as well)?

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1099s

There are a number of websites/businesses that I have wanted to make but they would have involved paying people commissions/etc. For instance an ad broker website (like Google Adwords/Adsense). The only thing that prevented me from doing so thus far would be my uncertianty reguarding IRS regulations related to paying people commissions.

Many affiliate websites do not require tax IDs, many do. I'm a bit foggy about the requirements.
§ 6041. Information at source
(a) Payments of $600 or more

All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments to which section 6042 (a)(1), 6044 (a)(1), 6047 (e), 6049 (a), or 6050N (a) applies, and other than payments with respect to which a statement is required under the authority of section 6042 (a)(2), 6044 (a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.
So my questions reguarding this issue would be:

1) If none of the affiliates make more than $600 in a calender year a 1099 wouldn't be required for any of them and it would just be a matter of claiming the payments as a business expense on a Schedule C. Correct or incorrect?

2) Is it required to obtain a tax ID/issue a 1099 only for those affiliates who have earned $600 or more? Any affiliates who earn less than $600 in a year I wouldn't have to collect any information from?

One affiliate program withheld a certain percentage of the check until I provided a tax ID number, despite the check being only for $40 or so. Others will happily pay (atleast up to $600) without asking for a tax ID or withholding taxes from the payments. Who is right?

3) Naturally, asking affiliates for their tax ID number up front is an option, but it also would cut down on the number of potential affiliates (due to the fact not everyone has an EIN and many are uncomfortable giving their SSN). Also on the issue of international affiliates, to my understanding 1099s aren't required to be issued for non US residents/citizens living abroad. If commissions are paid via PayPal (which in my case they probally would be) how am I to be sure that someone who says they are an international affiliate isn't really a US citizen lying to prevent a 1099 being filed on them? (more precisely, what steps, if any would the IRS expect me to take to verify the accuracy of the information provided to me?).

Programming the website and paying the affiliates by PayPal is the easy part, being sure what the IRS wants is the part that confuses me a bit.

Also there are a number of online sites (some multi-million dollar businesses) that I am positive make payments exceeding $600 in a year to people and do not require any tax ID information. An example of this would be websites that act as an auction service for virtual items in online games, some of these websites buy and sell "virtual currencies" in various online games (such as gold in World of Warcraft [WoW]). People buying "WoW gold" pay the company directly, and those selling "WoW gold" receive payments directly from the company, very often in excess of $600 without asking for any tax id information or issuing 1099s. Are such companies in violation of the law or is there a reason this rule wouldn't apply to such a business?

Possible answer to my own question (that could be wrong):

In the above example, those payments wouldn't be classified as "rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments" and cannot be proven by the payer to be "other fixed or determinable gains, profits, and income" (since the "WoW gold" they sold could have been purchased by them earlier for the same price). Therefore they wouldn't be required to issue 1099s(?)

Also, would the type of business described (buying/selling "WoW gold) above be considered a "currency exchange"? (a currency exchange would be subject to other regulations I doubt most of these businesses would be in compliance with).

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I would generally use a 3rd party affiliate site (like clickbank), let them make the payments and deal with the regulations, but a better understanding of the requirements involved would probally be helpful for future reference. Thanks in advance for any information/opinions you can provide.
Last edited by RyanMcC on Tue Jul 01, 2008 2:59 am, edited 1 time in total.
Nikki

Re: A few tax related questions.

Post by Nikki »

1 - EIN: The key letter there is the "E" for Employer.
It is (in highly summarized generality) an identifying number issued to businesses who have employees. A non-business indivisuial will have a very difficult time obtaining one.

2 - If you ARE running a business, you need to keep extremely detailed, ongoing records of all receipts and payments to support your tax return. In general, if payments are going to people (either real or artificial) in excess of $600 / year / payee, a 1099 is required. If the payee won't give you a valid Taxpayer ID Number, don't do business with them because you won't be able to issue a valid 1099. Even if someone doesn't pass the $600 threshhold, you need to keep detailed records of who they are, how much they received, and what they were paid for. HOWEVER -- You need to know the difference between purchasing goods and services.

3 - Withholding until a TID is provided -- who is right? Simple. The person who is making the payment is right because they have the money. Whether it is a legal matter of mandatory or not is immaterial.

4 - how am I to be sure that someone who says they are an international affiliate isn't really a US citizen lying to prevent a 1099 being filed on them? (more precisely, what steps, if any would the IRS expect me to take to verify the accuracy of the information provided to me?).

The IRS expects reasonable prudence. If you maintain adequate records, including copies of all claims by affiliates as to their residence, you have performed reasonable diligence. However, you should check with PayPal regarding payees. If PayPal tells you nothing, keep a record of it. Remember, PayPal DOES tell the IRS (in response to a court order).

All in all, the simple answer is spend a few bucks and get a consultation with an accountant.
RyanMcC

Re: A few tax related questions.

Post by RyanMcC »

RyanMcC wrote:
Nikki wrote:One affiliate program withheld a certain percentage of the check until I provided a tax ID number, despite the check being only for $40 or so. Others will happily pay (atleast up to $600) without asking for a tax ID or withholding taxes from the payments. Who is right?
3 - Withholding until a TID is provided -- who is right? Simple. The person who is making the payment is right because they have the money. Whether it is a legal matter of mandatory or not is immaterial.
Whether it is a legal matter of mandatory or not is precisely why I asked the question actually. In the event I create my own ad brokerage or similar site and have to pay affiliates, I wanted to know which was the correct way to handle payments:

a) Make the full payments until the $600 threshold is reached; or
b) Withold a percentage of the payment (for taxes) until a valid TIN is given.

Is (b) required?

I don't have any immediate need for any of this, but since I tend to come up with various business ideas in any given week it would be helpful if I understood the requirements in general more clearly.
Nikki wrote: 1 - EIN: The key letter there is the "E" for Employer.
It is (in highly summarized generality) an identifying number issued to businesses who have employees. A non-business indivisuial will have a very difficult time obtaining one.
I found the following IRS page reguarding tax ID numbers:

http://www.irs.gov/businesses/small/int ... 96,00.html

Is there seperate Tax ID number could I get (other than my SSN) to provide to websites that request a TIN? I thought the EIN was the right one, though I definately do not plan on having any employees.

--
CaptainKickback wrote:Here's the thing with 1099 income, you will be entering the world of quarterly estimated tax payments and paying the full share of Medicare and Social Security taxes. Happiness and joy.
I've had the pleasure of experiencing that "happiness and joy" for the last 4 years. I also haven't had to set an alarm in that time, so I guess it's a trade-off.
Nikki

Re: A few tax related questions.

Post by Nikki »

How Long Will it Take to Get an EIN? Answer

Are there a different TIN (Taxpayer ID Number) that you can use?

No. Valid TINs include ONLY SSN, EIN, ITIN (non-residents and resident aliens), ATIN (for pending adoptees), and PTIN (for paid tax preparers).

What you need, unless you intend to operate with your SSN, is an EIN.

Regarding the withholding, check with your friendly, naighborhood spiderm\\\\\\\ CPA. He or she should have all the latest information and the ability to discuss it in simple English.

Additional information available at Small Business/Self-Employed Virtual Small Business Tax Workshop
jg
Fed Chairman of the Quatloosian Reserve
Posts: 614
Joined: Wed Feb 25, 2004 1:25 am

Re: A few tax related questions.

Post by jg »

Is it required to obtain a tax ID/issue a 1099 only for those affiliates who have earned $600 or more? Any affiliates who earn less than $600 in a year I wouldn't have to collect any information from?
Technically it is not required for you to obtain an ID number from those that are paid less than $600 per year; but practically there is no way to determine which those are in advance. If you do not collect the information up front it is very difficult, in my experience, to obtain the information at the end of the year when it is later determined that it is needed.

As the payor, it is your responsibility to exercise due diligence in the collection of the required information. Although it is possible to document your efforts to unsucessfully obtain the information at the end of the year (e.g. by keeping the returned certified letters sent) and thereby meet the due diligence standard to avoid the up to $50 per item penalty, the only practical method to ensure gathering the data needed is to get it before any payment is sent. See http://www.ehow.com/how_13653_meet-dead ... iling.html for some more information.

It is not your responsibility to verify the information given to you as the payor by the payee. You can accept the information provided to you via Form W-9. See the form at http://www.irs.gov/pub/irs-pdf/fw9.pdf

I hope this helps.
“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” — Plato