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  1. #1
    Join Date
    February 15th, 2008
    Rocky Mountain
    Income tax problem
    Perhaps you already know fatwallet which offers cash back to online shoppers who click through their affiliate links. I am doing a similar website but with an extra feature - rewarding the deal posters. The amount of the rewards is based on the generated revenue from the thread (s)he posted, say 1% of the total revenue for that thread is paid to the poster.

    But this raises a question that we, as an LLC, will need to send the posters tens of thousands of tax forms. I am wondering how to get around this. I am thinking of not allowing posters to cash out the rewards, but let them to ask us to buy something from online merchants for them - gift (?). I am wondering if this is legal or not.


  2. #2
    ABW Ambassador
    Join Date
    January 18th, 2005
    Nunya, Business
    You need to ask your accountant that.

  3. #3
    Super Dawg Member Phil Kaufman aka AffiliateHound's Avatar
    Join Date
    January 22nd, 2007
    West Covina, CA
    Giving them a "gift" or or whatever you call it, doesn't change the reporting requirement, it is still income. Generally, any person who receives non-employee compensation in excess of $600 in a tax year must be sent a form 1099-misc., and the original is sent to the IRS.
    Since June 10, 2012 a vegan aarf but still writing the Hound Dawg Sports Blog
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  4. #4
    Best New ABW Member 2007 sfcom's Avatar
    Join Date
    October 9th, 2007
    Columbus, OH
    Yep...I got one of those from Microsoft. I should have checked how much it changed the amount due the IRS on our taxes this year.


  5. #5
    Join Date
    January 18th, 2005
    You cannot avoid tax-reporting requirements by falsely claiming that a payment is a "gift." As noted, you are required to notify the IRS (and state taxing authorities) of all payments to individuals (whether in cash or in kind) which exceed $600 during a calendar year. This is generally done through a "batch upload" of data annually; for each such report, you must notify your user (via a 1099 form).

    You should certainly budget this, both for the cost of printing and mailing AND for staff time to deal with questions and complaints and error-corrections. And of course, you must deal with the ongoing compliance issues (verifying that tax forms were properly submitted before issuing some payments).

    There are also some special requirements for reporting payments to persons outside the US, including special withholding requirements.

    I believe that payments to US corporations are exempt from the reporting requirement (probably because most corporations don't use calendar-year tax accounting and thus a 1099 reporting calendar-year earnings wouldn't help the IRS nearly as much).

    You should take reasonable steps to insure that none of your users are using multiple accounts or phantom business entities to circumvent the reporting requirements. I think this is why some merchants and some affiliate networks require tax forms from ALL affiliates.

    I believe the IRS has issued special regulations to deal with reporting and tax-form handling of "rebates." The problem for your users is that some rebates will be taxable, and others might not be taxable. Since your plan is to reward users for transactions resulting from deals & coupons that they reported, some transactions will be rebates and others will just be commissions (and you probably can't know which are which, so it's possible that any special "rebate" rules might not apply).

    One strategy that some folks (including some of the credit-card rebates) use to avoid the reporting requirement is to "cap" the maximum annual rebate that any individual may receive at $500. That's fine for most rebate sites, but probably not for your business model.

    Note that the "IRS reporting requirements" are absolutely separate from record-keeping requirements; you must maintain records of ALL payments to ALL entities, for tax purposes.

    Some payments may be subject to tax-withholding requirements (if your user or the IRS notifies you that the person is subject to backup withholding requirements).

    (Please note that my comments here are intended only to identify some of the key issues, and should not be relied upon as tax or legal advice. Contact your accountant or attorney for specific advice and recommendations.)
    Last edited by markwelch; March 2nd, 2008 at 10:23 AM.

  6. #6
    Join Date
    February 15th, 2008
    Rocky Mountain
    A big thank you to you guys, especially to markwelch

    I think I won't enable this rewarding feature until I can get enough revenue to hire people . But I will build this feature into the system for future use.

  7. #7
    Join Date
    March 16th, 2007
    I think that's the right call. Unfortunately, many of the fun ideas around incentive / cashback / gifts are going to hit a brick-wall around the IRS reporting requirements. I know it's a bummer, but you can't work around it. So it goes.

    Although, I had one thought. You said 'wait until we have the employees', can't this stuff be easily outsourced to India. I hear more and more about accounting tasks being done in India... Just a thought.

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