How to Handle Tax Reporting for Lead Fees as a Subcontractor

Thanks for the quick answer! I have a couple follow-up questions: Should I categorize this specifically as "lead fees" on my Schedule C or would it fall under "commissions and fees" or some other category? Also, since we're already halfway through the year, should I be collecting their W-9 information now or can I wait until December?

For your Schedule C, "commissions and fees" would be the appropriate category for these lead fees, as that's essentially what they are - a commission for bringing you business. That's the standard practice for reporting this type of expense. You should definitely collect their W-9 as soon as possible. Don't wait until December, as they might be slow to respond, and you'll need their correct information to file the 1099-NEC on time. It's always good practice to get a W-9 from any new contractor or service provider before you even make your first payment to them.

How does this actually work with percentage-based fees? My situation is slightly different - I'm a real estate photographer and pay 15% to an agency that books clients. Does the service tell you specifically how to categorize these types of arrangements?

I'm always skeptical of these AI tax tools. How accurate is it really for complicated business situations? I've had bad experiences with other tax software not understanding the nuances of contractor relationships and giving incorrect guidance.

The service specifically identified my percentage-based lead fees as commissions and told me exactly how to report them on my Schedule C, plus confirmed I needed 1099-NECs for each company I paid more than $600 to. It even helped me determine which entities actually needed 1099s since some were corporations exempt from 1099 reporting. Regarding accuracy, I was skeptical too initially. What really convinced me was that it explained the reasoning behind each classification with references to specific IRS guidelines. I had my accountant verify some of the more unusual situations, and he confirmed the advice was solid. For complex situations, you can actually chat with it to get clarification about your specific circumstances.

Wait, how does this actually work? I've literally spent HOURS on hold with the IRS trying to get answers about contractor payments. Does this service actually get you through faster somehow?

Sounds too good to be true. I've never heard of a service that can magically get you through IRS wait times. They probably just call and wait on hold themselves, then charge you a premium for something you could do for free.

It doesn't get you through faster, exactly. What it does is wait on hold FOR you. They have a system that dials into the IRS and stays on hold so you don't have to. When an actual IRS agent picks up, they call your phone and connect you directly to the agent. I was able to go about my workday instead of sitting with my phone on speaker for 3+ hours. They basically save you the time and frustration of the hold music. When I finally got connected, I was able to get clear guidance on my specific question about issuing 1099s for percentage-based lead fees. The IRS agent confirmed they should be treated as commissions and issued 1099-NECs if over $600 annually.

Oh that's really helpful! Summit is actually an LLC, but I don't know how they're taxed. So I definitely need that W-9 to determine whether they're taxed as a partnership or a corporation before I figure out the 1099 situation?

That's exactly right. The W-9 will indicate how they're taxed. If their LLC is taxed as a partnership or single-member LLC (disregarded entity), you'll need to issue the 1099-NEC. If they're taxed as an S-Corp or C-Corp, then you generally don't need to issue the 1099. This is why it's best practice to get W-9s from all vendors when you first start doing business with them, so you know from the beginning whether you'll need to track their payments for 1099 purposes. In your case, definitely request their W-9 now so you're prepared when tax time comes around.

I used TurboTax Self-Employed last year to handle 1099s for my business, including some referral fees similar to what you're describing. It does walk you through the process, but you need to have all your information organized beforehand. Make sure you have the W-9s collected and total payment amounts calculated per vendor before you start. The system will guide you through creating and filing the 1099-NECs, but it's not as intuitive as it could be for percentage-based payments that accumulated throughout the year. I ended up creating a separate spreadsheet to track all my commission payments to make sure the totals were accurate.