No one ever goes it alone in business. You are going to need some help. That is why you bring in people to help you not only do the administrative stuff you could never master (filing, accounting and all those boring tasks you need to do). That is why you bring in employees or hire contractors to do the things you don’t have time or skills to do yourself.
Schedule C Line 10: Commissions and Fees
But you not only hire people to do the administrative tasks, you also hire or contract with people to bring in customers. Sometimes, you would pay these independent contractors with a commission based on the amount of sales they bring in, or some other metric you ask them to achieve. The commissions you pay these people are reported on line 10 of your Schedule C. Let’s take a look at what is included in these amounts, and when they should be recorded on line 10 of the Schedule C.
First of all, these commissions would be amounts paid to independent contractors. The commissions paid to regular employees would be included with employee compensation on line 26 of the Schedule C. Independent contractors are either individuals or businesses that provide a service to your business or to individuals. They are separate business entities and are not considered employees. You will need to report the amount of commissions paid to these independent contractors on Form 1099-Misc in box 7.
Managing Contractors and Your Taxes
Keep in mind that when you contract with the people who will work on commission, you would need to have them fill out a W-9, Request for Taxpayer Identification Number (TIN) and Certification. This is needed so that you would not have to withhold backup withholding, and automatically withhold a flat 28% of their earnings.
The IRS Definition of Commission
Secondly, there are items that are not included in line 10 of the Schedule C. Some would argue that the tips your employees receive could be considered a commission, and should therefore be included in what you report in line 10. However, the IRS has determined that these are to be considered wages, and should be reported by the employee with their regular earnings, and you should include these amounts in with employee compensation on line 26 of the Schedule C.
Ok, so what doesn’t go here that you might think would go on this line? You may start doing business overseas, and you may do business in countries where bribes and kickbacks are a normal part of business. However, here in the United States, we passed the Foreign Corrupt Practices act, which forbids engaging in bribery. Since it is illegal to give bribes, you can’t deduct any amounts paid for these purposes.
Know what to report with regards to commissions and fees can be a bit overwhelming. Don’t be afraid to ask an accountant if you have questions and for guidance on how to report these expenses on your taxes. I always enjoy helping my clients understand their tax situation, and I would rather have you ask what something means than have you make a decision based on information about which you are confused. If you have questions, find a local accountant to give you a hand. We love to help people with their taxes, and always invite questions. You can also submit your questions in the comment section below, and I would be glad to answer them.
Stuck on another line of the Schedule C? Visit our Schedule C Line by Line Guide.
Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at firstname.lastname@example.org, or check out his blog at www.theaccountingscribe.com . In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.