My wife has recently become involved in a network marketing (AKA direct sales) business. She has no inventory - she takes orders from her customers and submits them to the company, who then ships the product either directly to her customer, or to her for personal delivery to the customer (especially if she combines orders from several customers and submits them as one big order). The company charges her 65% of suggested retail price (SRP); she is free to sell the products for whatever she wants, but for simplicity, lets assume for the moment that she always charges SRP.
She can pay the company using her own credit card (and collect checks or cash from her customers), in which case she would pay her 65%-of-SRP price to them; or she can pay them by providing credit card numbers for one or more customers and specifying how much to charge each card. Note that in that case, the total charged to customer credit cards would be SRP, even though she only owes them 65% of that. When that happens, the company sends her the difference in a check at the end of the month.
My question is whether standard practice in this kind of setup would be to show her gross income/receipts as a) what the customers payed (SRP), with her product cost as an expense, or b) her profit on the sale (35% of SRP).
We have been told (but won't know until we get it) that her 1099-MISC from the company will include her (presumed) profit of 35% of SRP for any sales to retail customers (along with commissions based on sales by her downline), even if she chose to charge some of them something less than full SRP. That implies to me that the company believes that IT is paying her that 35%, since they are reporting it as a payment on a 1099-MISC that they issue. That strikes me as odd - it seems like that profit actually comes from the customer, not from the company. The fact that the company would put the 35% on her 1099-MISC seems to characterize the transaction as being between the company and the end customer, with my wife being paid what amounts to a sales commission of 35%, in which case it seems like that would be her income. But, the fact that she can set the price of the product would seem to characterize the sales transaction as being between HER and the end customer, so that her income would be the retail product price, and she would have an expense equal to the 65%-of-SRP that the company charges her.
Adding to the confusion is the fact that, even if she sells the products for
90% of SRP, in which case her profit will only be 25% of SRP (instead of 35%), her 1099-MISC will include 35% of SRP. Of course, in many cases, the company will have no idea what she charged the customer, so they couldn't possibly report the correct profit on the 1099. I understand that her Schedule C should report her income, not "what it shows on the 1099-MISC"; in fact, that's why I'm asking this question, so we can keep the correct records for Schedule C reporting, no matter what's on the 1099.Is there a "standard" way to handle this sort of business?
Whit Matteson