I sell merchandise on consignment. Do I need to send 1099's to the people whose work I sell?

[AmyC]

Yes, you must file the 1099-MISC if you paid someone $600 or more. The IRS clearly states in Specific Instructions for Form 1099-MISC:

File Form 1099-MISC, Miscellaneous Income, for each person in the course of your business to whom you have paid the following during the year:

• At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8).

• At least $600 in:

1. Rents (box 1);

2. Prizes and awards (box 3);

3. Other income payments (box 3);

4. Generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 3);

5. Any fishing boat proceeds (box 5);

6. Medical and health care payments (box 6);

7. Crop insurance proceeds (box 9);

8. Payments to an attorney (box 10) (see Payments to attorneys, later);

9. Section 409A deferrals (box 12); or

10. Nonqualified deferred compensation (box 14).

@Yat70

[Yat70]

Are you saying it doesn't matter that material was sold, just that money was paid out to an individual? Do you know of any specific documentation on consignment? 

[JamesG1]

I find no specific directions, but that is my understanding of the IRS Instructions for Forms 1099-MISC and 1099-NEC.  Other income is on page 5.

The income of $600 is the determining factor. 

For instance, you bought product A for resale and paid $590.  If you sold product A for $595 and had no other transactions during the year, the 1099-MISC would not be required.

If you sold product A for $601 and had no other transactions during the year, the 1099-MISC would be required.

[Emmadd33]

I have a group of Consignors in my shop.  When I fill out the 1099-NEC do I put the total amount sold before the stores percentage is taken out? For example, if they sold $1000 worth of product but we took 30% and wrote them a check for $700.  Does just the $700 go on the 1099? Hope this makes sense! 

[DianeW777]

No. Consignment shops issue a Form 1099-K if the criteria is met for a consignor. The tax law for consignment shops is gray only to the extent that "consignment" many not be used in the language, however it is a payment for the sale of goods by a third party and not for the services of a person.

• Who Must File

  Every payment settlement entity (PSE) or other party which submits instructions to transfer funds to the account of a participating payee, in settlement of reportable payment transactions, must file an information return (Form 1099-K) with respect to each participating payee for that calendar year.

• IRS Instructions for Form 1099-K

Since consignment companies are now issuing 1099-K forms to keep on the good side of the IRS you should report ALL gross sales on the Schedule C and then simply deduct the commissions paid out as an expense.  This will net you the same amount but keep you from having a mismatch with the IRS. 

[jpf126]

Ok, I have a client that sells children's clothing.  They not only sell on consignment (vendor gets 30%; my client keeps 70%) , they sometimes buy the clothing outright and then sell for their own account.   I told my client that I wanted to do some research first but my gut feel is that in the latter case, I didn't think they needed to send a 1099 regardless of how much they paid for the vendor's goods.  But in the case of a consignment, the 30% commision paid would be subject to the 1099/$600 or more rules.  So by way of example:

1. Example 1: Vendor A comes in with children's clothing that my client feels she can sell for at least $2,000.  My client suggests that she pay Vendor A $650 for this inventory and Vendor A agrees.  I am thinking that no 1099 is required because my client is buying inventory for $650 not paying a commission.

2. Example 2:  Vendor B comes in and says I have children's clothing that I would like my client to sell on consignment.  My client and Vendor B agree that if sold, my client will pay Vendor B 30% of what my client realizes from the sale of some or all of this clothing.  In this case, my client is paying a commission and if the aggregate amount of commissions paid during the year to Vendor B equals or exceeds $600, a 1099 would be required.

Thoughts?

[DaveF1006]

Yes, I agree you are right in both assumptions.  According to this IRS.gov link, "If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-NEC needs to be completed," The key word is services.

In the first example, you are paying for inventory, which does not  require a 1099. The second example is an example of a service being provided. This requires a 1099-NEC in accordance with IRS guidelines.

[sadams66]

So I'm confused.

Everything I'm reading says that you are not to receive a 1099 for selling merchandise to someone.

It is my understanding that a 1099 is for services not merchandise.

???

[LeonardS]

Yes, 1099's are for services.  If you purchase more than $600 in services from an unincorporated business in a year then you are required to provide them with a 1099.  You do not issue 1099's for merchandise you sell.

[Yat70]

Thank you DianeW777.  This is the best answer I have received.  

[AL108]

Isn't this only true if the consignor is being paid via credit card? What about consignors being paid by check?

[GeorgeM777]

Yes, if a consignor is being paid by check, and was paid more than $600 in 2022, you still need to send the consignor a 1099.  The method of payment, whether by check, credit card, cash, does not matter.  As long as more than $600 was paid, then you need to send the consignor a 1099.

Prior posts mention a 1099-K.  Payment Settlement Entities (PSE), such as PayPal or Block, are generally required to send a 1099-K to customers using their platforms when payments in excess of $600 have been processed.  Unless you are a PSE, you likely will not be issuing a 1099-K to consignors you paid more than $600. Instead you will issue a 1099 to the consignor.  

There are two types of 1099s, a 1099-NEC and a 1099-Misc.  1099-NEC is issued when payment is made to a non-employee (NEC means non-employee compensation).  If the person you are paying is self-employed, a freelancer, a contractor, or someone with a side gig, then you will probably want to use the 1099-NEC form. Your consignor might consider themselves self-employed, in which case you will likely send them a 1099-NEC.

A 1099-Misc is for payments unrelated to non-employee compensation.  Such payments include rent, prizes, and awards.  Here is a link to a TurboTax article that explains the differences between a 1099-NEC and a 1099-Misc. 

What Is The IRS Form 1099-Misc

@AL108