How to Handle Lead Fee Tax Reporting for Subcontractor Relationships

I'm in a bit of a tax reporting pickle with my contracting business. We're a small consulting company (let's call us SmartTech Solutions) that recently started working as a subcontractor for a larger firm. The arrangement is that they send clients our way, but they take a 15% cut from any job we get through them as a "lead fee" or finder's fee. I'm trying to figure out the correct tax reporting for this. From my understanding, since we (SmartTech) are the subcontractor receiving services from the larger company, we would need to issue them a 1099 for the 15% they're taking as their fee, right? For example, if we bill a client $5,000 for a project, the larger company takes $750, and we get $4,250. I want to make sure I'm handling the tax reporting correctly before we get too deep into this arrangement. Would I need to create a 1099 for the company that's taking that 15% lead fee? Any insights would be greatly appreciated!

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19 comments

Quinn Herbert

•8M

You've got it right! Since you're paying them for their service of finding clients for you, you need to issue them a 1099. The key thing to understand is that you're essentially purchasing a service from them—client acquisition—and that fee is 15% of your project revenue. Think of it this way: the total amount of the project is yours, and you're choosing to pay them 15% for their lead generation service. That payment for their service requires a 1099-NEC since it's a business-to-business payment for services that exceeds $600 in a calendar year. Make sure you have their W-9 on file before issuing the 1099. Also, keep detailed records of each project, the total amount, and the calculated fee so you can accurately report the total amount paid to them at the end of the year.

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Quinn Herbert

•8M

That's a great question! It actually depends entirely on how the arrangement and payment flow is structured. If the larger company collects the full payment from the client first and then pays you the 85% as a subcontractor, then you're correct - they would issue you a 1099 for what they paid you, and you wouldn't issue them anything. In this case, they're the primary contractor with the client. However, based on the original post, it sounds like SmartTech is billing and collecting from the client directly, then paying 15% to the larger company afterward. In this scenario, SmartTech would need to issue the 1099 for the lead fees paid.

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Hazel Garcia

•8M

Just went through something similar with my business. I was spending hours trying to figure out the right way to handle these lead fees and subcontractor relationships. Found this AI tax assistant at https://taxr.ai that analyzed my contract and payment structure in minutes, then gave me the exact reporting requirements. It looked at how my payments were flowing and confirmed I needed to issue 1099s to my lead generators. The best part was getting a simple explanation of WHY I needed to file certain forms based on my specific situation. Saved me from making a costly mistake that could have triggered IRS notices.

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Hazel Garcia

•8M

It handled my multi-tiered contractor situation really well. I uploaded my contracts and it mapped out the payment flow, then identified exactly which payments needed 1099s based on the relationships. It breaks down the specific tax code sections that apply to your situation. The system actually references specific IRS publications and tax code while explaining things in plain English. For my lead fees specifically, it identified that they were service payments rather than commission splits, which made all the difference in reporting requirements.

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Geoff Richards

•8M

I was totally wrong about AI tax tools. After that discussion about lead fees, I decided to try https://taxr.ai for my business. Uploaded my contracts with marketing partners who send me leads, and it immediately clarified the tax reporting requirements. Turns out I've been handling these fees incorrectly for TWO YEARS! The tool showed me exactly why my lead generation payments needed 1099s based on how our contracts were structured. It even provided the exact forms I needed to file and deadlines. I was able to correct past filings before they became a problem. Never thought I'd say this, but the AI approach was actually more thorough than my previous accountant's advice.

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Simon White

•8M

If anyone's struggling to contact the IRS about this lead fee reporting issue, try Claimyr (https://claimyr.com). I spent WEEKS trying to get through to a human at the IRS to confirm the proper way to report similar lead fees in my construction business. Found this service that got me connected to an IRS agent in under 45 minutes when I'd been trying for days on my own. They have this callback system that somehow navigates the IRS phone tree and holds your place in line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly how to handle the 1099 reporting for our lead fees and answered all my specific questions about our unusual payment structure. Completely worth it for the peace of mind.

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Simon White

•8M

They don't call for you - it's a system that navigates the phone tree and holds your place in line. Then when they reach a human, you get a call to connect directly with the IRS agent. No need to wait on hold yourself. It absolutely works during tax season - that's exactly when I used it! I was shocked too because I had tried calling multiple times over two weeks and couldn't get through. The service had me connected within 45 minutes of signing up. The trick is they have technology that keeps your place in line even when the IRS would normally disconnect you.

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Geoff Richards

•8M

I take back EVERYTHING I said. After being the biggest skeptic about Claimyr, I tried it this morning out of desperation. Had a complicated question about reporting lead fees for my multi-state business that my accountant couldn't answer definitively. I was connected to an IRS agent in 37 minutes! The agent walked me through the exact reporting requirements for our situation and confirmed we needed to issue 1099s to our lead generators based on our specific contractual arrangement. She even emailed me the relevant publication sections afterward. For anyone dealing with contractor/subcontractor relationships and lead fees, getting direct confirmation from the IRS saved me from potential reporting errors. Cannot believe I wasted three days trying to call them myself.

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Nasira Ibanez

•8M

One thing to consider with these lead fee arrangements is whether the fee is truly for lead generation or if it's a revenue split. The distinction matters for tax reporting. True lead generation fees (where you pay for being connected to a client) are service payments requiring a 1099. But if you're operating under a revenue-sharing agreement where they're essentially a partner in the business relationship, the reporting requirements might differ. I learned this the hard way when the IRS questioned our reporting of fees that were actually structured as commission splits. Worth looking at the exact language in your agreement.

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Nasira Ibanez

•8M

Based on that contract language, yes, it would most likely be considered a payment for services that requires a 1099. When the contract specifically calls it "payment for client acquisition services," the IRS would typically view that as you purchasing a service from them. If it were structured as a revenue split or commission arrangement, the contract would usually contain language about "shared revenue" or "commission splits" and might include different terms about the business relationship. The specific language in contracts really matters when determining tax reporting requirements, so you're on the right track focusing on those exact terms.

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Khalil Urso

•8M

That's a fair point. I didn't mean to sound dismissive. I started doing my own taxes too but switched to a CPA once these business relationships got complicated. For DIY filers, I think the main thing is documenting everything clearly - get those W-9s from anyone you pay, track all payments meticulously, and maybe consider investing in good accounting software that flags when you need to issue 1099s. The peace of mind is worth it, even if you're handling tax filing yourself.

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