What this line means
A checkbox indicating whether the payer made $5,000 or more in direct sales of consumer products to you for resale. This applies to people in direct sales businesses (sometimes called network marketing or multi-level marketing). If this box is checked, you are considered a buyer-reseller, not an employee, and the income is reported on Schedule C.
Does this apply to you?
- You participate in a direct sales or network marketing company (Amway, Herbalife, Mary Kay, etc.) and purchased $5,000 or more of products for resale
- You received a 1099-NEC with Box 2 checked
Easy to overlook
This box means you are treated as self-employed When Box 2 is checked, the IRS considers you a statutory nonemployee. You report income and expenses on Schedule C, you owe self-employment tax, and you can deduct business expenses like inventory costs, shipping, and marketing materials. Many direct sellers do not realize they are running a business in the eyes of the IRS. 1 IRS 1099-NEC instructions — Box 2
Your cost of goods sold offsets the income The $5,000+ in products you purchased is your cost of goods sold. You report the resale revenue on Schedule C line 1 and subtract the cost of products on line 4 (calculated in Part III of Schedule C). Only your profit is taxable. Filers who report the full resale amount without subtracting product costs overpay significantly. 2 General filing pattern — direct sellers misreporting income
Watch out for this
Ignoring the 1099-NEC entirely because “it is just a direct sales side thing.” The IRS receives a copy. If you purchased products for resale and did not file a Schedule C reporting the activity, the IRS will match the 1099-NEC to your return and send a notice for the full amount as unreported income — without any deduction for the products you bought.
Footnotes
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IRS Instructions for Form 1099-NEC, Box 2. https://www.irs.gov/instructions/i1099nec ↩
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IRS Instructions for Form 1099-NEC. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩