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My husband and I recently started selling a product online.

Customer Question
The product was invented by...
My husband and I recently started selling a product online. The product was invented by my husbands best friend so he fronts us the equipment, we sell it, then we give him 90% and keep our 10%. It occured to us today that we could get taxed for the full 100% since it may look like all our profit. How do I work this out that we only pay taxes on the income we make?
Thanks,
Ashley
Submitted: 8 years ago.Category: Tax
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9/2/2009
Tax Professional: Merlo, Accountant replied 8 years ago
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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HelloCustomer

Basically you will have to report this income at the end of the year as income from self employment on Schedule C. In January of 2010, you should issue a 1099-MISC form to your friend to report the amount of money that you paid to him. That form will be sent to your friend and copies will also be sent to the IRS. On Schedule C you will then show the entire amount you were paid, but will deduct the money you paid out as reported on the 1099-MISC form.

The 1099-MISC form acts much the same as a W-2 form in reporting income that was paid to someone, so by issuing this form it allows you to deduct the money from your income, and your friend will then have to declare this as income on his own return.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank youCustomer

Merlo
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Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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Customer reply replied 8 years ago
so I send him a 1099 so that he can claim his 90% and we only pay taxed on the 10% that we profitted?
Tax Professional: Merlo, Accountant replied 8 years ago
Hello againCustomer

Yes, you will send him a 1099 form to report the amount of money that you paid to him.

You will still need to report the full amount that you received on Schedule C of your tax return, but then you will deduct the amount you paid to your friend, and you will only end up owing tax on the net amount that you actually kept for yourself.

On Schedule C, line 1, you will report the total amount you received. And then on line 10 which is for commissions and fees, you will deduct the amount paid to your friend, and you will end up owing tax only on the net amount of 10% that you kept for yourself.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank youCustomer



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