Annual 1099 reporting is one of the more annoying and burdensome compliance exercises that American businesses must go through each year. It’s a major category of “information return reporting” mandated by our government. So, what exactly is “information return reporting”? In short, it is used to inform the government about reportable transactions that occurred during the year. Copies of the information return reporting are required to be filed with the government and provided to the affected party (usually the recipient of reportable payments).
The universe of US information return reporting is vast. Just take a look at the IRS webpage, A Guide to Information Returns, to get the idea. In this article, we’re going to focus our attention on just the 1099 reporting, which is quite common for consignment and vendor-based businesses. It’s important to know that your business may be subject to additional 1099 reporting requirements as well, which is why you should work closely with a qualified tax advisor to help keep your business fully compliant.
1099-MISC Reporting: The two most common reportable transactions (payments to non-employees for their services and payments for rent) were both reported via Form 1099-MISC. However, the IRS recently introduced Form 1099-NEC into the mix and now requires that payments to non-employees for their services be reported via a 1099-NEC form .
We’ll look at 1099-NEC a little closer, but for now, let’s look at the most relevant reportable transaction that consignment and vendor-based businesses would report on Form 1099-MISC… payments for rent. Real estate rental payments (i.e. store lease payments) are reported in box 1 of Form 1099-MISC. But businesses aren’t necessarily required to report all real estate rental payments. The instructions for Form 1099-MISC say that you do not have to report real estate rental payments on Form 1099-MISC if you paid them to a real estate agent or property manager. If you did that, the reporting requirements are on them, not you.
Keep in mind that only rental payments totaling $600 or more during the year are potentially reportable. Conversely, , rental payments made by payment card or third-party network transactions are not required to be reported. If you pay your rent in that way, the third-party settlement organizations (processors of payment cards and third-party network transactions) are responsible for the reporting.
1099-NEC Reporting: This is the 1099 reporting that is most common for consignment and vendor-based businesses. Payments to non-employees and payments to attorneys are reported in box 1 of Form 1099-NEC. But businesses aren’t necessarily required to report all these payments. Only payments totaling $600 or more during the year are potentially reportable. Also, payments made by payment card or third-party network transactions are not required to be reported. The instructions for Form 1099-NEC also say that only payments for services performed by someone who is not your employee should be reported. The term “services” is important, especially for consignment and vendor-based businesses.
The instructions further clarify that payments for merchandise and similar items are exempt from being reported on form 1099-NEC. So, when it comes to payments to non-employees, only the payments for their services are required to be reported. For consignment and vendor-based businesses, this means that payments made to consignors/vendors for the purchase of their merchandise are exempt from 1099-NEC reporting.
Misconceptions: Our interpretation of the reporting requirements are that payments made to consignors/vendors for the purchase of their merchandise are exempt from 1099-NEC reporting. However, because of the vastness of 1099 reporting and the complexities/ambiguities of the accompanying government instructions, many folks have different interpretations. We believe these are misconceptions and that it would be helpful to address a few of the most common ones. Here’s where some business owners mistakenly believe that payments made to consignors/vendors for the purchase of their merchandise are required to be reported:
- 1099-MISC, Box 3 (Other Income) Reporting: There are many reportable transactions that can be reported in box 3 of Form 1099-MISC. The instructions for Form 1099-MISC list quite a few. But nowhere do the instructions indicate that payments made to consignors/vendors for the purchase of their merchandise are required to be reported. However, much like the specific instructions for Form 1099-NEC, the specific instructions for Form 1099-MISC clarify that payments for merchandise and similar items are exempt from being reported on form 1099-MISC.
- 1099-MISC, Box 7 or 1099-NEC, Box 2 (Direct Sales) Reporting: According to the instructions for both Form 1099-MISC and Form 1099-NEC, this box is clearly intended to be used by direct selling establishments (Avon, Mary Kay, etc.) to report the sales of merchandise to partners who then resell the merchandise outside of a permanent retail establishment. Nothing about this is indicative of payments made to consignors/vendors for the purchase of their merchandise.
- 1099-K Reporting: According to the instructions for Form 1099-K, this type of 1099 reporting is intended to be used by third-party settlement organizations (processors of payment cards and third party network transactions). That part is straightforward and does not correlate with payments made to consignors/vendors for the purchase of their merchandise. However, the skeptics out there can also take a look at the IRS Form 1099-K FAQ webpage where it’s expressly stated that “In-house accounts payable departments do not fit the definition of a third-party settlement organization because they are internal processors of payments. They are not a third party.”
Disclaimer: All of the information provided above solely represent our interpretation of IRS 1099 reporting instructions and are not intended to be tax or legal advice in any way, shape, or form. We highly recommend that you work closely with a qualified tax advisor to help keep your business fully compliant with 1099 reporting requirements specific to your unique business.
