what are the legal/tax issues for running a marketplace with split revenue with the sellers?


I'm working on an online store where sellers will be posting their digital content, and buyers will buy it. Right now I'm thinking of just doing a 50/50 split of the sell price. The store is no where near ready to go live yet so this might change.

My question though is what sort of legal/tax obligations am i opening myself up to by doing this? If the buyer gives me the money and i then have to give the seller their cut, is the seller then considered an employee? What if i made a system where half the money went to me and the other half to the seller at the time of purchase, without the sellers cut ever actually going to any account of mine - like for example submitting two payment submissions to paypal, one for my account and one for the sellers?

If it matters, i'm based in california - the sellers can be from anywhere. And the digital content will be artwork.

Oh, and any suggestions as to what payment gateway system to use would also be appreciated. Although i very much want to avoid using paypal - i dont care about sending money to someone's paypal account, but i don't want to use them to receive payments.

Thanks for any advice.

Market Selling

asked Jan 21 '11 at 04:58
108 points

1 Answer


The only tax you may have to worry about for the full sale price is sales tax. Your company or individual taxes will be based on your net profit, which will be the amount of money you make after you pay the fees to the seller.

In the case of an LLC, in California, that's a bit different. That is based on your gross income which would be the entire sales price.

My advice would be to determine the sales model you want and then sort out the type of company structure that makes sense.

answered Jan 23 '11 at 23:57
Jarie Bolander
11,421 points
  • so- if i am an LLC (currently i'm not) then i would have to pay income tax based on the total price even though i'm only really taking half of it? Would i then record the half i pay as a business expense? i.e. would i wind up paying the same amount in taxes and just have to file it differently, or would i actually be likely to pay more in taxes as an LLC? What about federal? If i wind up paying any of the sellers over $600 in a single year, do i have to file a 1099? thanks – Merk 13 years ago
  • The LLC on Gross income only applies in California. Federal taxes are still based on net income. So, you would pay taxes on gross revenue in California and net income on the Federal level. Next year, if the law is not changed, you will have to file a 1099 for every vendor you pay more than $600 dollars for. – Jarie Bolander 13 years ago

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