Retail Industry ATG - Chapter 3: Examination Techniques for Specific
Industries (Direct Sellers)
Gross Receipts
A direct seller prides himself in naming his own hours and has the luxury of deciding how much or how little time is
spent on running the business.  Typically, direct sellers spend approximately:

* 44% of their time on selling the product or service,
* 20% of their time on administration and paperwork,
* 15% of their time on recruiting or sponsoring others,
* 10% of their time on either training someone else or receiving training themselves, and
* 9% of their time on miscellaneous other duties.

The above percentages are only estimates.  A direct seller may spend more or less time on each activity
depending upon where the seller is in developing the business and whether the seller is engaged in a single or
multi-level effort.

In order to know how much commission a direct seller is earning we must know when the direct seller is eligible for
a commission. Each company has its own specific method of determining commissions.  Some examples of when
commissions are paid include:

* At the time the order is placed with the company for shipment,
* At a later specified date, even though the customer pays the full merchandise price upfront, and
* A portion of the commission is paid upfront and the remainder paid at a later specified date.

There are two ways that a direct seller can earn income/profits:  They can sell the product and they can
sponsor/recruit new representatives.  Each company has its own set percentage of commission on direct sales, as
well as additional percentages of additional income from their “down-line” sales.  These percentages are generally
smaller but are based on sales produced by that recruit.

Example:  A direct salesperson/consultant would receive a 25% commission on personal sales.  Once they
sponsor/recruit two new consultants, they receive an additional 2% of the recruits’ sales each month.  If they
sponsor/recruit four to six new consultants, this percentage increases to 7%.  Both the original consultant and the
recruits start earning additional income.  In addition, if one of their recruits sponsors two new consultants, they can
earn 4% of the sales of those new recruits.  Below is a chart comparing the commissions paid by a few well-known

The companies listed below are only examples.  For a more complete listing of companies, visit the
Direct Selling
Association - Membership Directory or's MLM Company Profiles.
In addition to the base commission and the additional commission earned on a down-line, there is an added benefit
of personal discounts.
The personal discounts in the above examples show an average of 36% savings on personal purchases of the
products that are offered by the companies. The discounts range from 20% (Pampered Chef) all the way up to
50% (Mary Kay).

All income that is received as a result of direct sales is taxable under IRC Section 61 and should be reported as
gross receipts. There is a misconception that if the income is not reported on Form 1099-MISC it is not taxable.
Direct sellers may receive income in several different forms, including:

* Income from sales - these are payments received from their customers for product purchases.
* Commissions, bonuses, or percentages of income received as a result of sales from others who work under them
(commonly referred to as their “down-line”).
* Prizes and awards received from the selling business, taxable under IRC Section 74.
* Income also includes products received as a result of meeting certain sales quotas (for example, receiving all
products displayed on the front page of the new catalogue in exchange for selling at a certain level for that month).
* Typically, the hostess, not the direct seller, receives gifts. However, gifts received by the direct seller are
considered payments to help the direct seller make sales. The fair market value of these gifts must be reported as
income under IRC Section 61.

Form 1099-MISC
IRC Section 6041A(b) and Proposed Regulation Section 1.6041A-1(b) require information reporting on Form 1099-
MISC if: (1) any person engaged in a trade or business during any calendar year sells consumer products to any
buyer on a buy-sell, deposit-commission, or similar basis for resale (by the buyer or any other person) in the home
or otherwise than in a permanent retail establishment; and (2) the aggregate amount of the sales to such buyer
during such calendar year is $5,000 or more.

A person is considered to sell a product to a buyer for resale even though the buyer does not acquire title to the
product prior to selling it to the consumer.  For example, a person paid on a commission basis who does not
acquire title to a product before selling it to the consumer is considered to have bought the product for resale for
purposes of IRC Section 6041A(b).

In the direct selling industry, gross receipts are generally based on “commissionable sales.”  Commissionable sales
are retail sales of products for which the sales representative earns a commission.  Sales may include items that
are sold specifically on a non-profit basis, whether for a charitable purpose or as a reward for hitting a certain pre-
set sales figure per customer.

Example:  A customer who purchases a minimum of $30 worth of retail products receives the opportunity to
purchase a specific item at a special sales price of $6.75.  The sales representative earns a base commission on
the $30.00 retail sale, but does not earn anything on the special sales price item.  This is used as a “carrot” to
entice customers to purchase enough to receive the opportunity to purchase the special sales price item.

It is important to remember that compensation in a direct seller marketing plan is derived primarily from the sale of
consumer products to ultimate consumers and users.  Ultimate consumers include those direct sellers who
purchase products for their personal, family, or household use.  No compensation is earned merely from the act of
recruiting additional participants to the plan.

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