Question for Consignment Sellers, about Schedule C

[fromatoc]

Does anyone here sell primarily on consignment? I'm confused how to structure my 1099 / Schedule C. Obviously the sales amount is not my earnings; my earnings are after I pay out my clients. So how do I structure them as deductions? Is that part of Cost of Goods Sold? Do I have to issue them 1099's? (I don't think anyone made $600). And what do I need to prove the deduction? Do they have to write me an invoice? Do I have to issue checks? I'm very confused here.

If anyone sells on consignment, can you tell me what kind of accounting system you use? How do you structure it all? Do you work with an accountant to help you?

THanks so much.

[heckofagame]

If you are the seller, your sales are your gross revenue. I include the shipping costs as part of my gross revenue and then take a deduction for the shipping costs.

The consignment payouts would be a deduction. The consignment items are not part of YOUR inventory, so those items would not affect your costs of goods sold. 

If you are paying with a check, that cancelled check along with a signed invoice of some sort should be adequate proof or your consignment payout. 

And yes, I use an accountant. I bring all of the numbers to him and he fills out the tax forms. 

[fromatoc]

But what kind of deduction is that? What do i classify it as?

[heckofagame]

It goes on your schedule C as an expense, just like rent, utilities, etc.

[fromatoc]

Thanks. Bc I thought you have to specify what kind of expense it is.

What about when you pay our your clients on chase quickpay or on paypal? How do you have a paper trail for paying out consignees?

You have no idea how helpful this is. I'm lost here.

[heckofagame]

Always print a receipt or an email showing a payment. You are looking for paperwork that shows the transfer from you to the consignee. First rule of business: keep complete and accurate records. 

I also highly recommend retaining an accountant. They can answer your questions and give you guidance.

[iart]

First, talk to an accountant.

If you haven't been planning ahead, you could be in trouble.

Unless you got Social Security Numbers for your clients, I don't think you'll be able to send a 1099.  If you ask now, they will probably refuse and even get angry (check out some of the hilarious posts in here about this subject).

Obviously, your payouts to them are deductible, but if you're called on it through an audit, how do you prove it? You should have been keeping records of dates, items, client info, sales, expenses, payouts, all along. If you haven't, you can try to work from memory but that's going to be hard to prove.

Note that your clients will be very upset if they find out you are using these sales to decrease your taxes and, potentially, increase theirs. For some reason, many Americans think that these kinds of taxes are voluntary.

[kosmosattik]

The IRS has a Catch-22 evidently arising from not considering platform sales.  See Isabella G's take in this link:

https://ttlc.intuit.com/community/taxes/discussion/how-do-i-report-my-income-at-my-consignment-shop/...

Reporting the 1099 amount as revenue and remittances to the clients as a Cost of Goods Sold seems like the best way to go.

[lacemaker3]

@fromatoc 

If you are operating a consigment business, then you  need to be filing Schedule C Small Business with your tax return. You have quite a lot of listings up already, so I presume that you are already operating this business. Since you don't know how your taxation will work, you can't know what records you need to be keeping. You need to find an accountant or tax professional to advise you.

Your payments to your clients are part of your Cost of Goods Sold, which is a specific section on the Schedule C. You can get the form and the instructions from the IRS website, and it would be a good idea to do that. If you have questions after you read them, ask your account or tax professional.

https://www.irs.gov/forms-pubs/about-schedule-c-form-1040

Form 1099-K is used to report payments that are processed for you by a third-party payment processor, like a merchant gateway that processes credit/debit cards, or PayPal, or eBay managed payments. If you were selling on Amazon, Etsy, Walmart, or Wayfair, they would also be processing payments for you. You could expect to receive a 1099-K from any of those payment processors, if you exceeded the threshold with them.

As a consignment seller, you are not processing credit/debit cards for your clients, so you do not issue 1099-K forms to them.

[slippinjimmy]

The payouts to your consignors should go in Part III,  "Cost Of Goods", Line 36 "purchases".

[heckofagame]

Disagree. You would only use line 36 for items that you would purchase for resale. Consignment payouts would be an expense.

[lacemaker3]

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@fromatoc wrote:

Thanks. Bc I thought you have to specify what kind of expense it is.

What about when you pay our your clients on chase quickpay or on paypal? How do you have a paper trail for paying out consignees?

You have no idea how helpful this is. I'm lost here.

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Yes, we can see that you are lost ... because of that, you REALLY NEED to consult a professional who can guide you on your exact circumstances.

Yes, you can use digital payment services to pay your clients, if they are agreeable with that. If any of your clients receives more than $600 through a single payment processor (after the beginning of 2022) then they will receive a 1099-K from PayPal for that. This might not be a good thing to do, because of that.

[heckofagame]

How do they IRS 1099-MISC rules apply to this?

About Form 1099-MISC, Miscellaneous Income | Internal Revenue Service (irs.gov)

[lacemaker3]

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@slippinjimmy wrote:

The payouts to your consignors should go in Part III,  "Cost Of Goods", Line 36 "purchases".

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I would recommend putting payments made to consignors as "Other costs" on Line 39.

[heckofagame]

The consigned items are not the property of the consignor and would not be considered inventory and therefore, you would not use the costs of goods sold items. Consignee payouts are an expense. 

I've had an accounting firm doing my taxes for over 15 years and this is how we have handled this. 

That's all I have to say except; "ask an accountant that is familiar with this stuff".