Sponsors financially support an individual or organization in return for passive or active promotion of brands, products and services. The Internal Revenue Service considers payments received from sponsors as either qualified or nonqualified. If a payment doesn't qualify for tax-exempt status, a sponsored person will receive an IRS Form 1099 from his sponsor, which he will have to report as income on his federal tax return.
If an individual receives sponsorship for displaying logos or company names on an informal basis, he won't receive a Form 1099 or have to report his qualified sponsorship as income. This rule also applies to slogans branded by a company to promote a product.
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An individual will receive a Form 1099 if he signs a licensing agreement with a sponsor to display logos, names and slogans. Nonqualified payments also include promotional messages containing pricing, savings and value information about a company's products for which the sponsored individual receives compensation.
The IRS considers all payments received by conventions and trade show vendors as taxable, because these payments directly promote products and services. A qualified payment counts as a nonqualified payment if the sponsor requires certain attendance levels or ratings for the sponsored individual to receive benefits. However, payments count as qualified if the sponsor only requires that an event occur for disbursement of funds.
If someone receives a sponsorship in return for qualified and nonqualified promotion of a company and its products and services, the U.S. government considers only the nonqualified portion of sponsorship received as taxable.
A sponsor must report more than $600 in nonqualified payments made to a sponsored individual annually by filing Form 1099 MISC with the IRS. The sponsor will send another copy of the form to the person by the end of January the following year. The individual must then file Form 1040, Schedule C and Schedule SE to report the income and calculate the required Social Security and Medicare taxes.
Because of the slight differences that can turn a qualified payment into a nonqualified one, recipients of sponsorship should ensure their Form 1099 doesn't contain less or more income than they must report. Sponsored individuals should carefully read Section 513(i) of the Internal Revenue Code or consult a professional accountant to determine their tax liability.