How does this multilevel marketing scheme work?

[Chris268]

I need help trying to figure out this multilevel marketing scheme.   My client can't possibly be telling me the whole picture and I think I need to understand what she is doing.

She claims she joined Neways as a Life Coach and is purchasing thousands of dollars of product from Modere.  

She received a 1099-NEC from Neways for over $10,000 which she says is commission.

She has evidence of purchasing about $9,000 of Modere products which she claims she kept for personal use with a small amount given away as gifts.

I don't think it is possible to get $10,000 in commissions by purchasing $9,000 of products.

She doesn't have a website and claims she doesn't sell anything.

What am I missing from this picture?

[qbteachmt]

"She doesn't have a website and claims she doesn't sell anything."

Well, it's possible to provide coaching and even conferences, and provide products in support of your teachings. This is the part that matters:

"which she claims she kept for personal use"

Then this is not business expense. I can be a Hair Stylist; if I buy $5,000 of shampoo for myself, not for my business activity, then I might have an issue between myself and the sale tax agency, of course, but this is personal use.

"I don't think it is possible to get $10,000 in commissions by purchasing $9,000 of products."

That might or might not be where the money comes from. It can be referrals, or marketing sessions, or? Only she knows.

What she has to know is, she doesn't seem to have many expenses, which is not a problem, either.

[Chris268]

The problem I am having is that this is an internet business.  She does not have a store or store front, but she does not have a website either.  She has no mileage expense because she is not traveling to give the gifts or the conferences.  She has no shipping expense to send the gifts.

I realize that the product that she purchased is not a business expense.  

It is supposed to be multilevel marketing and she wants to all her expenses as marketing.  I'm trying to figure out how she got the income.

I suppose you're right, and it doesn't matter.  I just have the 1099-NEC.

[qbteachmt]

"this is an internet business. She does not have a store or store front, but she does not have a website either."

Did you mean, she works with clients via remote sessions (phone, screensharing, video)? Me, too. And I don't bother with a website, either. But I do not deal with products.

"She has no mileage expense because she is not traveling to give the gifts or the conferences. She has no shipping expense to send the gifts."

Yes, she told you: Used Personally.

"I realize that the product that she purchased is not a business expense."

Okay.

"It is supposed to be multilevel marketing and she wants to all her expenses as marketing."

All her Expenses will be whatever they are. That doesn't include Personal, though. All her business expenses would be reported as such. Not everything she Spent. That's different.

"I'm trying to figure out how she got the income."

What you should worry about is if there is business income not reported via 1099-NEC. Because a business reports all of the income. Whether there is 1099-NEC reporting or not doesn't preclude the business from reporting everything that happened.

I can work with clients and gross $millions. As long as none of them is a business, or as long as none of those business people pay me $600 or more, there will be no 1099-NEC issued for my work at all.

I still need to report $millions on my business tax return.

She needs some coaching, herself.

[Chris268]

Thank you.

You are right about other income not reported on the 1099.  I'm pretty sure she is only working with that one company, but I will ask.

I am concerned because both her and her husband have high income government-type jobs with W-2s.  This is a community property state and I don't think he has a clue of what she is doing with her money, other than there must be a garage full of this product.

I am also concerned about the sales tax issue.  So far she has not given me receipts.  I'm not sure how much to keep pushing her or just deal with what I have.

Thanks for your help.

[TaxGuyBill · Accepted solution]

Ask your client what she actually does.

Multilevel Marketing is usually partly based on people you 'recruit'.  For example, let's say your client convinced Jane Doe to join this group, and Jane Doe sells $100,000 of items.  Your client will receive part of the commissions on that because your client 'recruited' Jane Doe.

[Chris268]

Thanks.  I will try again.  She is very evasive.  She says she is a Life Coach, but she does not have clients that she coaches.

I have asked her if she paid all sales tax on internet purchases and she answered she uses Amazon, Target, and Walmart, and they all charge sales tax.  She did not mention all this product that she bought that I suspect is whole sale.

She said she has to buy $900 of product to earn commissions, but she bought $9,000.

I suspect it is like Avon and she is using Life Coach instead of salesperson because it sounds better.  The company that sent her the 1099 sells health and beauty products, apparently.

I expected that she would take her taxes elsewhere, but she didn't, and I almost told her to take her taxes elsewhere, but I didn't. but these are pretty important executives with a lot of money, so I think maybe I should help her to do it right.

[Chris268]

We will never know because she decided to take her taxes elsewhere.

I'm sure she owes the sales tax.

She was deceitful from the very first contact and I'm glad to be rid of it.

[qbteachmt]

You dodged a bullet, because a person that gets away with shady stuff, tells all of their friends who also want to get away with shady stuff, and that is not a client base you want or a reputation you need.