COMMISSIONS & FEES

Commissions Paid

Commissions paid by your business to employees, real estate agents and contractors, to name a few, are generally fully deductible business expenses that no entrepreneur should overlook. Depending on your business, commissions can quickly add up and end up being one of your largest deductions.

LANDLORD

Genie owns a rental property in Tampa, Florida that she rents out on a short-term basis through a local real estate agent. She uses the hurdlr app to track all of her rental property expenses, including commissions paid to her agent, which totaled $5,000 last year. When Genie prepares her Schedule E at the end of the year she will be able to deduct the full value of commissions paid to her agent on line 8.

DEVELOPER / ENGINEER

Haruo is an entrepreneur who develops the best mobile apps around. To help market is suite of apps, he hired two part time college students to generate sales leads. For each subscriber they bring in, Haruo pays a $50 commission. Last year Harou paid his two part time students a total of $13,000 in commissions, which will be deductible expenses on line 10 of his Schedule C (the base wages he pays them are reportable on line 26).

PHOTOGRAPHER

Esther owns a small real estate business where she specializes in flipping houses for homeowners who need instant cash. She contracted with two other real estate agents and agreed to pay them a 5% commission on all sales. Last year, one of her contractors had $700,000 of sales, the other $1,000,000. Esther would deduct $85,000 (5% x $700,000 + 5% x $1,000,000) of commission expenses on line 10 of her Schedule C.

PHOTGRAPHER

Asia is a photographer that just moved from Nashville, Tennessee to Orlando, Florida. To help launch her new business she has offered her new clients a referral fee of $50 for every two friends referred to her. So far Asia has been referred 18 new customers and paid out $450 in referral fees. Asia will be able to deduct the full $450, along with any subsequent commissions she pays out prior to the end of the year on line 10 of her Schedule C.

AUTHOR / SPEAKER

Donovan an author who just finished writing a science fiction book on UFOs. He has contracted with an agent who will help him supply his books to a chain of bookstores nationwide. As per Donovan's agreement with his agent, he will pay her a fixed fee of $15,000. When Donovan files his taxes at the end of the year, the fixed fee will be deductible as a contractor expense on line 11 of his Schedule C. Donovan would only consider this fee, or a portion of this fee a commission if were variable based on the number of books his agent sells.

WHAT YOU SHOULD KNOW ABOUT DEDUCTING COMMISSIONS

If you are a real estate agent that sells a property and is paid a commission fee, you would need to report the fee as part of your gross income. You would not be eligible to deduct any commission expense. The same logic would be true for anyone who is receiving a commission payment.
If you are a small business owner and you paid an employee or contractor a fixed rate, plus a commission, generally you would want to split his or her total compensation between wages, contract labor and commissions on Schedule C lines 10, 11 and 26. Note that if you are paying commissions to an employee, you may be liable to withhold certain payroll taxes from commissions paid.
If you are a homeowner and you pay a commission to a broker to help you sell or purchase personal property, it would not be considered a deductible expense.
In some cases, you may find it difficult to determine if an amount you paid should be classified as an advertising expense or a commission (i.e. referral fee). At the end of the day, as long as you are not deducting the same expense twice you should be able to classify the expense into either category based on what you deem to be most appropriate.

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