Disclaimer: the following information is purely “food for thought” and should not be construed as tax advice. Everyone’s tax situation is different. Please consult a tax professional for guidance for your specific situation.
Amazon Vine is a program in which participants have access to promotional products at no cost. The total value of the Vine products that participants receive during the year is considered taxable income.
Vine participants are required to report this amount as income on their federal tax return. If more than $600 worth of products are received in a given year, participants receive a 1099-NEC (Non Employee Compensation) form from Amazon. The 1099-NEC received from Amazon lists the combined Estimated Tax Value (ETV) of each item that was requested and received for a given tax year.
For more information about the program, visit our About Amazon Vine page.
About That Extra Vine Income…
When you first start in Vine, getting all those products is pretty exciting. But when tax time comes around, reality starts to sink in. Vine products are considered income; unfortunately it’s not the type of income that you can spend, or will pay the mortgage, or buy groceries. Nonetheless, you’ll have to pay taxes on it.
Not only can that additional income from the Vine program increase the amount of taxes you owe, it could also impact your finances negatively if you retired early, are receiving unemployment, or if you purchased health insurance through the ACA marketplace.
Social security benefits are reduced by $1 for every $2 you earn in excess of $21,240 for 2023 ($22,320 for 2024) until you reach your full retirement age. Your income from Social Security may be partially taxable if your combined income exceeds a certain amount.
Savings subsidies you receive for health insurance plan purchased through the ACA marketplace may have to be partially or fully repaid if your income exceeds the amount you projected. With the average subsidy of $6000 per year, the repayment penalty could be substantial.
Many benefits are calculated based on your gross (or modified gross) income. You may find a way to reduce your overall tax burden from Vine income through FMV adjustments or deductions, but that only affects your net income.
A higher income could also impact your children’s ability to get special student loan financing rates for college.
The implications of that extra “income” are even greater for people receiving income-based benefits. Many social subsidy programs (SSI, housing, medical, disability, food, child care, etc) calculate eligibility based on the modified gross income of the household. This means that excess income not only affects you, it can also have an impact on others in your household if they are receiving benefits.
What Happens If You Don’t Report The Value Of Vine Products As Income
It doesn’t matter if you receive $75 or $1000 worth of Vine products, the IRS expects you to report it as income. If you don’t report it, you could be subject to back taxes as well as a 20% penalty. Not reporting the value of Vine products as income could lead to an audit wherein potentially every aspect of your tax return is scrutinized, possibly leading to even more problems.
The amount you report to the IRS must match the amount that Amazon reported to the IRS, otherwise the IRS Automated Underreporter (AUR) program could flag your tax return because of the mismatch between your reported income and the amount shown on the Form 1099-NEC from Amazon.
How Does Amazon Establish The Estimated Tax Value Of Vine Items
The ETV is the posted value of the item you agreed to when you requested and took ownership of the item.
For IRS’s purposes, Amazon’s ETV is considered the Fair Market Value (FMV). Per the IRS “FMV is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts”.
It doesn’t matter if 20 other Amazon sellers were selling the exact same item for 60% cheaper, nor does it matter that the seller was offering and continues to offer a 50% off coupon to regular Amazon customers; Amazon reports the ETV of the item at the time you requested it.
Can I Reduce My 1099-NEC Amount By Adjusting the Fair Market Value Of Items?
It’s true that the ETV on some Vine items is inflated.
Here’s where things get sticky; with Amazon Vine products, you were provided with the ETV before you requested the free promotional product. You had the opportunity to review the ETV, compare prices with other comparable Amazon products and even check prices at other stores. You had the option to not request it if you felt that the item’s posted taxable value was excessive. Per Amazon, if you disagree with the posted ETV of an item, they suggest you do not request it. The bottom line is that we agreed to the listed FMV when we requested the item, having had “reasonable knowledge of the relevant facts”.
Maybe you requested an item and didn’t realize how overpriced it was until after you received it (at which point you can’t cancel or return it). If you’re going to take a serious tax-hit on it, it seems reasonable to adjust the FMV for tax purposes on that product. If you do this, you will want to be prepared to fully defend your position and have the documentation to prove it.
But if you plan to contest the ETV on all your Vine orders, you should probably be prepared to explain why you chose to continue requesting all those items if you felt that all the posted values were inflated. If the IRS takes the position that you agreed to the FMV when you requested the item (you had reasonable knowledge of the relevant facts and were not required to take action), you could be liable to additional taxes and possible penalties.
One reason you may not want to contest the FMV is if you report Vine income as a hobby and decide to convert the item from personal use to business use. Doing so might allow you to apply the full FMV for that item as a 179 deduction (more on that below).
Isn’t It Worth Less Because I Reviewed It?
Some Vine participants have taken the position that the act of reviewing a Vine product renders it used, reducing its FMV.
The problem with this approach is that (per Amazon’s policy), they do not require that you write a review. If you opted to use a product in order to provide a review, this action was entirely voluntary. Whether or not you write a review will not impact whether you can request and receive Vine products at no cost. Reviews are required if you want to remain in the Amazon Vine program, but you can initially receive hundreds of dollars worth of products at no cost without ever writing a single review. You are not required to return the product to Amazon or pay for the product if you don’t review it.
Even if reviews were mandatory, the IRS doesn’t care what the value of a “promotional item” is after it is reviewed. They only care about the FMV value at the time you received it, which is what is reported to them on the 1099-NEC (think Capital Gains). Whether you damaged it/consumed it/etc so that you could stay in the Vine program doesn’t impact the value of the item at the moment you took ownership. Eat it, burn it, throw it away; the IRS only cares about how much it was worth when it arrived on your doorstep.
Is Vine Considered A Barter System For Tax Purposes?
A barter is where two parties mutually agree to exchange something such as goods or services, typically each having equal value.
For example, an electrician agrees to rewire the lighting in a building in exchange for office space. Once the trade is completed, each party is responsible for taxes on the goods or services they received. If the electrician completed the wiring but the building’s owner refused to provide the office space, the electrician could pursue legal remedy for the breach of their barter contract.
The FMV of the goods or services is considered taxable, and businesses report the value on form 1099-B or 1099-MISC. Businesses are also required to pay estimated taxes on bartered goods or services.
Promotional items you receive from Amazon are provided at no cost and the value of these promotional products are reported using IRS form 1099-NEC. The most important element that demonstrates the Vine program is not a barter system is that you are not required to return the item or pay for the item if you fail to review the item. Reviews are only required if you want to remain a Vine participant.
Should You Report Vine Income As Business Or Hobby Income
Depending on your filing status, you will report your 1099-NEC from Amazon Vine as either a Hobby (an activity that you pursue because you enjoy it, do not depend on for your livelihood, and with no intention of making a profit) with no deductions, or as a business income with possible deductions.
Everyone’s tax situation is unique, so there is no one size fits all solution. The single best way to select which option is best suited to your situation is to refer to the IRS’s 9 criteria for differentiating hobby or business income. Per the IRS, “A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.” The final test is that you must show a profit three out of every five consecutive years to be considered a business.
- Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
- Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
- Whether they depend on income from the activity for their livelihood.
- Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- Whether they change methods of operation to improve profitability.
- Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
- Whether the taxpayer was successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.
No matter how you decided to report this income be sure to document your logic, maintain good records, and keep documentation to support your position. Per the IRS, if you are audited you have the burden of proof.
There don’t seem to be a lot of previous case opinions in the US tax court (https://dawson.ustaxcourt.gov/) that might provide guidance for similar situations.
Business Income Considerations
If you were to list Vine income as a business income, you have the benefit of being able to deduct some expenses (supplies, home office, etc) to offset your Vine income. One of the drawbacks to reporting Vine income as business income is that you are liable for standard taxes as well as the extra self-employment tax of 15.3%. So, if you are in the 22% tax bracket, you could be paying up to 37.3% tax on your net Vine income. Additionally, businesses are required to pay quarterly estimated tax payments on projected tax liabilities.
You will need to demonstrate that you operate the portion of your business that generates Vine income for a profit. See the IRS’s 9 criteria for differentiating hobby versus business income above. If you don’t rely on Vine products for your livelihood and can’t demonstrate a business model to eventually turn this pursuit into a profit, your business classification (and expenses) could be scrutinized.
The test under IRS tax law is that you must show a profit three out of every five consecutive years to be considered a business. You may be able to show losses for the first two years (during the startup phase), but by the 3rd year you will need to show a profit.
Any Vine products that were converted to personal use will have to be itemized and addressed separately because their value can not be offset as business expenses.
Hobby Income Considerations
The prime benefit to reporting Vine income as hobby income is to avoid the extra 15.3% self-employment tax. If you are ordering Vine items primarily for personal use and do not rely on the subsequent sale of these items for your livelihood then reporting Vine income as hobby income may be the best approach. The downside is that you can not deduct any expenses you incur for your hobby.
If you are self-employed, one benefit to claiming Vine income as a hobby is that the IRS allows you to convert personal items to business use. If you primarily request Vine products for personal use but do find items for use in your business (printer ink, office furniture, tape, etc), you could theoretically convert them to business use and deduct their FMV as a 179 deduction. Again, not tax advice; just something to think about.
If you decide to sell items acquired during your “hobby” via eBay or Etsy, and/or receive payment through processors such as Paypal or Cashapp, you probably won’t have sold them for more than the FMV provided by Amazon and possibly won’t incur additional taxes because you will have no Capital Gains (profit).
But here is where it gets complicated depending on where you sell your items. If you are self-employed you will need to make a very clear distinction between your business and your hobby. If you sell items on eBay for your business, you will need a separate eBay account to sell your retail items and another one for your hobby items. This way eBay will send you separate 1099-Ks for each account, making it easier for you to distinguish what was business income and what was money generated from your hobby.
If you were to be audited for claiming Vine as hobby income, you will be asked to send additional documentation or an explanation to support your position. The following might be appropriate for explaining why Vine income was reported as a hobby:
I am reporting this income as a hobby because it relates to promotional items which I received without the requirement of providing a service by participating in the Amazon Vine program. I received items primarily for personal use, I participate without the intent of making a profit, nor do I rely on this income for my livelihood.
How To Report Hobby Income
Be aware that reporting 1099-NEC income as something other than Schedule C income is not common.
To enter this income on your federal return, you would list it on the Additional Income section of your 1040 form under section 8z Other income (ie $1200 1099-NEC Hobby income for Amazon Vine promotional products)
How To Stay In Vine And Stay Sane (from a tax perspective)
- Decide in advance how much you can request before it negatively impacts your income
- Regularly track the ETV of your Vine product requests
- Select products with the assumption that you’ll eventually have to pay taxes on the full ETV
- Select Vine items with $0 ETV
- Avoid Vine products with grossly inflated ETVs
- Set aside money for your taxes on ETV items (and pay quarterly estimated taxes if you file as a business)
- Keep detailed documentation for each product if you plan to contest your 1099-NEC
- Select Vine products that you can sell to offset any tax liability
Sources
https://viewfromthewing.com/how-to-dispute-the-value-of-miles-or-prizes-reported-as-taxable-to-the-irs/
https://ttlc.intuit.com/community/taxes/discussion/what-happens-if-you-report-a-difference-of-prize-winnings-and-the-fair-market-value/00/1661787
https://ttlc.intuit.com/community/after-you-file/discussion/my-1099-income-is-wrong-and-cant-get-a-hold-of-the-company-to-change-it-they-went-out-of-business/00/307033
https://ttlc.intuit.com/community/tax-credits-deductions/discussion/i-started-doing-item-reviews-on-youtube-can-i-write-off-the-items-if-so-how-much-if-i-have-to-use/00/338996
https://ttlc.intuit.com/community/self-employed-group/discussion/amazon-vine-1099-nec-can-i-deduct-amounts-if-i-can-show-what-the-item-amazon-charged-as-fair-market/00/3042164
https://ttlc.intuit.com/community/taxes/discussion/amazon-vine-and-online-retail-store/00/3077774
https://ttlc.intuit.com/community/taxes/discussion/amazon-vine-1099-nec-effect-on-federal-refund/00/2914309
https://www.irs.gov/pub/irs-dft/f1040s1–dft.pdf
https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business
https://www.irs.gov/taxtopics/tc420
https://www.irs.gov/taxtopics/tc420#:~:text=Bartering%20is%20the%20exchange%20of,to%20exchange%20property%20or%20services.
