File this one under Naked Conversations. We all live and learn in our first year of business, and I’m happy to share.

This post is for any agented author who in the past received 1099 amounts based on “net” receipts paid to the author by their agency. I know that many agencies have reported only net payments and that some may continue to do so, but in 2004 the IRS ruled that middlemen such as agents must report the “gross amount of royalties received from the publisher.”

Therefore, each 1099 I send out will report gross amounts received from the publisher and will include a short note detailing total commission charged.

When you do your taxes you will have to deduct the cost of commissions or expenses paid to your agency from the gross amount reported on your 1099-MISC. I know that some of my clients have already experienced this.

Of course, like many IRS rulings, this seems to be a waste of time (accounting software is geared to net payments of checks actually cut) that creates more paperwork for everyone for little purpose.

As a sole proprietor, and even after talking to my accountant, I believed that I might simply be 1099ed by the publisher and in turn 1099 my authors on their net receipts, but once I got into the nitty gritty of creating my 1099s I learned that we must add another 1099 from the author back to me for any commissions deducted ($600 and over).

Every author who paid me more than $600 in commissions will receive a short email statement in the next day, ahead of their 1099, so that they can plan to 1099 me. I’m not overly concerned that I receive these before January 31 since everything’s accounted on my end already, but the government must receive the 1096 form accompanying the 1099 by February 28.

I’m truly sorry for this inconvenience, and for anyone who has to 1099 me (or anyone for that matter), Gail Perry sent me this link to where you can submit a single 1099 with a 1096 at a cost of $3.79. For any of my clients who aren’t generating 1099s already and that want to take this option, I’ll repay you for any associated costs.

I was already planning to incorporate as an LLC after my first year and once the business was well established (it is) so this won’t recur in the future.

If your agency or agent is incorporated, you needn’t worry about reporting the commission payments.

Happy taxes everyone, and thanks for your patience.

  One Response to “Bummed out with “Grossed up” 1099s”

  1. Matt is correct, that authors who pay their agents $600 or more during the year are required to issue a 1099 to the agent, assuming the agent, like Matt, is unincorporated. This actually isn’t new law, it’s just law that no one seemed to pay attention to in the past. The result is the 2004 ruling, wherein the IRS called attention to the fact that this should have been going on for a long time and apparently most literary agencies and their authors were ignoring the law.

    Revenue Rulings such as the one to which Matt refers are designed to clarify the law, not make new laws. If you look back to the 1099 tax forms from several years ago, you’ll see that the directions stated very clearly that agencies were to report the full amount of royalty, not reduced by commission or other expenses, to the authors. The fact that the IRS saw fit to issue a ruling about this in 2004 means that they are now planning on paying closer attention to this aspect of the law.

    Even though this is just a lot of paperwork for us and shouldn’t change anything about the bottom line on either the agent’s or the author’s tax return, the IRS seems to want to make sure all the extra paperwork is done.

    The important thing is that we, as authors, must now remember that the 1099 amounts we see are gross amounts, not representing the amount we actually received from our agents. We have to remember to report this gross amount as income and take a deduction on our tax returns for all commissions withheld by our agents, as well as any other costs withheld, such as express mail charges.

    With regard the 1099 form we are required to file for Matt, there is a $50 penalty that the IRS can inflict on us if we fail to file the form, or fail to file on time.

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