What expense category is Non-Sales Commissions and Fees?

In the course of business, companies often pay fees or commissions for a wide range of services that are not directly tied to sales. This can include referral fees paid to another business for sending a new client, finder's fees for business opportunities, or other service-based commissions.

These payments are a common and necessary cost of doing business, and they are generally deductible. However, it's crucial for accountants and business owners to categorize them correctly and distinguish them from sales commissions paid to employees. This guide will clarify how to treat non-sales-related fees in accordance with IRS rules to ensure your business remains compliant.

Commissions and Fees (Non-Sales Related) Category

The fees and commissions you pay for non-sales-related services are an ordinary and necessary business expense. While the IRS does not have a single dedicated category for all such fees, they are generally deducted under one of the following:

• Commissions and fees: This is a specific line item on the Schedule C tax form.
• Legal and Professional Fees: If the fee is for professional or consulting services.
• Other Expenses: A general category for business expenses that do not fit elsewhere.

Important Considerations When Classifying Commissions and Fees

The key to handling these costs correctly is to understand their purpose and who is being paid.

Distinction from Sales Commissions

It is essential to separate these fees from sales commissions paid to your own employees.

• Commissions to Employees: These are considered wages and are reported on Form W-2. They are deducted as Salaries and wages expense.
• Commissions to Non-Employees: Payments to independent contractors or other businesses for services, such as referrals, are not considered wages.

Referral Fees

Payments made to another individual or business for referring a customer are a common business practice. These are generally deductible as a business expense, often categorized as an advertising or professional fee.

Information Reporting on Form 1099-NEC

If you pay an individual, partnership, or LLC (that is not taxed as a corporation) $600 or more during the year for services, including non-sales commissions or referral fees, you are required to issue them a Form 1099-NEC.

Fees to Acquire a Business

It is important to note that fees paid to help you acquire a business or specific assets are not currently deductible. As detailed in IRS Publication 535, these are capital expenditures that must be added to the basis of the asset acquired.

Tax Implications and Recordkeeping

To deduct these fees, you must report them correctly and maintain the required documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), non-sales related commissions and fees are typically deducted on Part II, Line 10, Commissions and fees. Alternatively, they can be included under Line 17 for professional services or Line 27a for other expenses.

What Records to Keep

You must have documentary evidence to substantiate all commissions and fees paid. Your records should include:

• The contract or agreement outlines the terms of the commission or fee that will be paid.
• Invoices from the service provider or individual.
• Proof of payment, such as a canceled check or credit card statement.
• A record of the business purpose for the payment.

How Fyle Can Automate Tracking for Commissions and Fees

Fyle helps you manage and document payments to third-party contractors and referral partners, ensuring every fee is captured, coded, and ready for tax time.

• Centralize Invoices: Have your partners and consultants email invoices so they can be forwarded directly to Fyle for automatic and accurate data capture.
• Track by Partner or Project: Code each fee to a specific referral partner or project for clear visibility and ROI analysis.
• Streamline 1099 Preparation: Fyle provides a clean, aggregated report of all payments to each contractor, simplifying year-end 1099 filing.
• Automate Your Accounting: Sync the categorized commission or fee directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.