This post is a guest post by Payment Rails, a Refersion integrated Partner. Payment Rails develops software to help companies pay non-employee compensation and comply with IRS regulations when paying 1099 and 1042 contractors. Payment Rails is not authorized to provide tax advice and we suggest all companies consult with their tax attorney prior to working with Payment Rails and while configuring any tax settings within Payment Rails
Affiliate programs are a powerful way for many companies to market their products and services to consumers. Affiliates have communities of followers that typically have niche interests. The right affiliates can introduce a brand and their products to consumers who are most likely to make a purchase. Unlike paid advertising platforms (ie. Google Ads, Facebook Ads), Affiliates tend to have a more personal, direct, and long term relationship with a brand.
There are two main challenges to affiliate programs that set them apart from paid advertising:
- Paying the affiliates on time for referrals
- Following IRS guidelines for tax compliance (1099 and 1042 contractors)
Step 1 Paying Affiliates
Paying affiliates can be done in many different ways. A solution like PayPal is easy and straight forward, however many affiliates prefer to get paid directly to their bank account for a few reasons:
a) Only 2% of the world’s population has a PayPal account, more than 60% have a bank account (that number jumps to 90%+ for developed countries)
b) Most people can’t pay their bills and rent from a PayPal account, so they end up having to withdraw the money to their bank anyways, with an additional 3–5 day waiting period.
The other challenge here is if payments are done separately from an affiliate platform, brands will have to export payment data, collect payment details from affiliates, and upload all the details into an offline payments platform. A platform like Refersion removes those manual steps by offering easy integrations directly to platforms like Payment Rails (which supports direct-to-bank and PayPal payouts).
Step 2 Gathering Tax Forms
Affiliates, in most cases (check with your tax attorney!), are considered independent contractors in the eyes of the IRS. This means that you’ll need to issue a Form 1099-NEC to US-based affiliates and a Form 1042-S to non-US affiliates at the end of the tax year.
Before you pay them, you’ll also need to establish their tax status. Typically, this is done by collecting a Form W9 (US Affiliates) or a Form W8-BEN / Form W8-BEN-E (non-US Affiliates).
In most cases, your affiliate platform will not do this for you and you’ll have to figure it out off-platform. Luckily, Refersion plus their Payment Rails integration solves this problem. Affiliates will be able to provide their tax status directly within the affiliate dashboard, and all their information is saved digitally.
Step 3 End-of-Year Reporting
For the end-of-year reporting, brands will need to create a Form 1099-NEC for each US affiliate paid more than $600 in the tax year and a Form 1042-S for every non-US affiliate paid in the tax year. Each form must have one copy sent to the affiliate, one copy sent to the IRS, and one copy kept on file with the payer (your company),
A 1099 takes two inputs:
- Information collected on the W9/W8
- Sum of payments sent to the affiliate.
Most affiliate platforms will help by providing CSV exports of the payments data, but leave you to upload all of the relevant data (payment date + W9/W8 data) into a 3rd party software of your choice, or manually prepare the forms.
Because Refersion with the Payment Rails integration keeps track of both the payments data and collects the W9/W8 data, you will be able to generate and electronically send all of the tax forms with a few button clicks.