Death, Taxes and Affiliate Marketing

… or when to ask your US affiliates for the W-9 form as an US based advertiser to avoid causing the “death” of some of your affiliates in your program.

There is a saying that states that there are only two things certain in life: death and taxes.
While the first one is only relevant for some very unique niches in affiliate marketing (Are there affiliate programs for funeral services?), is the second one a certainty, which affects all marketers, one way or another.

Each country has its own set of rules and laws regarding taxes, but I will talk only about the ones that affect affiliates and advertisers who operate within the United States, because that is where I do business and be able to provide tips and information from my own experiences with the subject.

Disclaimer: I am neither a lawyer nor a qualified tax consultant. The provided information is only meant as personal recommendation/suggestion based on my own personal experience. Please contact your legal and/or tax advisor to verify any information and claims made in this post before you act on them.

For the tax-requirements of the United States come two things in mind when talking about affiliate marketing and taxes: FORM W-9 and FORM 1099Misc.

For the more detailed legal requirements and links to the mentioned forms at government websites, see my “Reporting Taxes – Information for US Affiliates and Merchants” resources at Cumbrowski.com.

FORM W-9
Advertisers must request FORM W-9 from their affiliates at one point in their affiliate relationship.

It contains tax relevant information about the affiliate’s business entity, such as the business address, the legal type of business entity, e.g. “Individual” or “sole proprietor” (individual who filed a DBA – ‘Doing Business As’ for example), “corporation”, “partnership” or other. It also contains the affiliates unique taxpayer identification number (TIN), which is the Social Security Number (SSN) for either individuals or sole proprietor or it is the Employer Identification Number (EIN) for corporations and partnerships.

Additional Usage of FORM W-9 by Advertisers
The W-9 Form can serve a second purpose for the advertiser. Because it is an official and legal document, must information provided via the form be accurate. Providing intentionally wrong information on the W-9 is subject to penalties of perjury. It is a very good way for the advertiser to verify the identity of an affiliate.

FORM 1099MISC
Sometimes between January and end of February each year, affiliates find 1099Misc statements from affiliate networks or individual advertisers in their mailbox. The statement contains details about the commissions paid by the network or advertiser to the affiliate in the previous year. They have to do this if an affiliate was paid $600 or more in commissions in this time-period. The W9 FORM was necessary in order to meet this requirement. Note: If you received a 1099Misc statement, the IRS received the same statement as well. It is not only sent to you. Make sure that you include it in your income tax statements, because the IRS will look for it.

So far so good, but for advertisers remains the question when they should ask affiliates for the W-9 form in the process. They need it at some point of the relationship. Best would be to get it right away as part of the affiliate sign-up process, but will decrease the activation rate of your affiliates, because it is just one more step in the process that prevents an affiliate to get up and going and promoting your offers.

What are the possible options and choices an advertiser can make?
First: I would make it prominent in the request for the W9 form, if you use it not only for tax purposes and to meet the legal requirements instituted by the IRS, but also for validation purposes to confirm an affiliate’s identity. I have not seen yet that not sending a W9 resulted in a termination of an active affiliate relationship.

Option 1
To meet legal requirements and to make the process the least intrusive as possible, this would be the way to go.

You hold back an affiliate commission payment when it reaches the threshold of $600 (per year) and no W9 is on file, until you received a signed W9 FORM from your affiliate. Affiliates tend to send the form if a commission payment cannot be processed, because of it.

They are active affiliates of your program at that point and will give it more attention. This is the way to go, if growth of your program is important. It adds a layer of complexity to the process on the merchant side though. It would be important to know, if your affiliate program solution supports this option or not, if you run your program in-house.

Option 1b
Instead of holding back the commission payment that breaches the threshold of $600, could you hold back the initial commission payment already, regardless if it is less than $600 or not. Some companies send out W9 forms to the IRS and their affiliates if any commission was paid, even if it is less than the $600 minimum where sending a W9 is required by law. I suggest not doing that and only sending out a 1099MISC, if an affiliate exceeds the $600 threshold.

Option 2
If you want to insist on a W9 before any commission was earned by the affiliate, do not activate an affiliate account until a W9 was received.

Option 2b
If you activate the account without it, not all affiliates will send it to you unless a penalty as described in option 1 will force them to. You could send a reminder to the affiliate every month or so that there is no W9 is on file. If you still do not receive one and no commissions can be hold back, because no commissions were earned, you could eventually deactivate the affiliate account. As stated already above… I have not seen any merchant who is doing this so far. I would also suggest not doing this.

Conclusion
I hope that this clarifies the subject for affiliates and advertisers and will help you in your decision, which process to choose in order to balance legal requirements with the needs and goals of your program. Please feel free to provide any comment, suggestions, corrections and additions in the comment box below.

About Carsten Cumbrowski

Internet Marketer, Entrepreneur and Blogger. To learn more about me and what I am doing, visit my website and check out the “about” section.

Twitter: ccumbrowski

One Response to Death, Taxes and Affiliate Marketing

  1. Pepitaeabos says:

    How does this work if the advertisers is located in another country?