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This is a cross-post, originally posted in Webmasters.Stackexchange.com but it was suggested I post here instead:

My question is basically this: I have an idea for a web service that would potentially allow affiliates to earn money. What I'd really hope to avoid is actually having to collect things like their Social Security Numbers, EIN's, etc, let alone any of the other compliance type issues that could arise.

I'm wondering a couple of things.

First: The need to issue 1099's doesn't actually arise until you're paying out $600 or more in a given year. Could I feasibly just let the program run, but only make the requirement of providing an SSN for tax purposes kick in when the affiliate is going to go over the limit? Ie, for the first $550, no SSN checks required, but after that, they need to provide this info to receive additional payments?

Second: If I only make payments through a service like PayPal, who I presume has crossed all the T's and dotted all the I's, does this alleviate my need to do any additional checks on people (not that I even know what checks would be made).

Third: Going hand in hand with the only making payments through PayPal idea - If i accurately record payments to affiliates as Services provided, does PayPal take care of 1099's as part of their role? In that I would only have to report payments made to PayPal, and it would be on them to report payments made to the ultimate beneficiary?

This isn't a business that's been launched, but I'm trying to think out issues beforehand, and this is the biggest one I can think of - I would personally rather not have myself or anyone one on my team even be able to access anyone's SSN's, but if it moved forward, I would obviously want to do so in a way that was compliant with the IRS and any other regs.

Any thoughts or guidance would be appreciated, unless it's "contact an Accountant" - I already know that's the most correct answer, I'm simply wondering if anyone else has gone down this road and can save me a little time and money on this, as this is still just idea phase, not operating business phase.

Many thanks!

  • Could I feasibly just let the program run, but only make the requirement of providing an SSN for tax purposes kick in when the affiliate is going to go over the limit? How would you check then than user1 and MrSmith are not actually the same person? – SJuan76 Mar 22 '17 at 23:43
  • Hmm... I guess unique email address isn't going to cut it. But if payments only go through PayPal, i would wonder if they report back to me a universal ID for the user, or just give me a record of the email address I sent to, such that even if they opened multiple accounts under the same SSN, i would know whether or not I was paying the same person I had already paid before? – Lucas Krupinski Mar 22 '17 at 23:55
  • I guess I also have the question as to whether the payment i might make would be attributable to the ultimate beneficiary or to PayPal? Like if I send a check to you with instructions for you to pay that money to someone else, who do I issue a 1099 to, you (since I know you received the money) or the other person (since it was my intention to send it to them)? – Lucas Krupinski Mar 23 '17 at 0:20
  • Next post: found this link, which seems to indicate I don't need to worry about it if I pay through PayPal (or any other payment processor). smallbiztrends.com/2015/01/… – Lucas Krupinski Mar 23 '17 at 0:27
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As explained in more detail here:

The IRS instructions on Form 1099-MISC are pretty clear as to when and how you must file that. You don't need to file a 1099-MISC if total payments to an entity in a tax year are under $600. And if you don't need to file tax forms, you don't need to request a W-9. (If in doubt as to the entity receiving the money, you demand a W-9 from whomever is receiving a payment and use that as the basis of reporting payments.)

Furthermore, if you transmit the funds using a payment settlement entity who will report the transaction on a 1099-K, then you don't need to report the payment on a 1099-MISC. (See "Form 1099-K" ibid.)

PayPal is a payment settlement entity, so you don't need to worry about reporting payments you send through them ... with one big exception: PayPal does not report "payments to friends and family," and so if you're using that to avoid their fees then the IRS would consider you liable for reporting those payments on a 1099-MISC.

  • Thank you for that, definitely looks like if I stick to making payments through PayPal my life will be much easier. And yeah, if this moves forward my intention would be to report it as pay for services, no friends and family shenanigans. – Lucas Krupinski Mar 23 '17 at 12:03

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