Can real estate agents deduct admin fees and commission splits that come off the gross commission?

[TomD8 · Accepted solution]

If the admin fees are taken out of your portion of the commission, you can deduct them on your Schedule C.

You can deduct the split you pay to your Broker only if the 1099-MISC you receive at the end of the year includes the full amount of the commission (yours plus the Broker's).  This would be highly unusual.

In most cases, the 1099-MISC will reflect only the commission that you actually received.  In that case, you can't deduct the Broker's portion.  (But you won't be taxed on it, either.)

[Suzie2017]

For the first time in the years I have worked for this Broker, the they sent me a 1099 that included the full amount of the commission,  including his commission.   Which you say is highly unusual, and I agree. The brokers portion of the commission was deducted before I received my commission check.  Would this be deducted from line one on Schedule C somehow?   Line 7 on Schedule C should be the total amount I received, correct?   Since my contract with the Broker states that he shares in the total commission received, it's a commission not a expense, correct?    The commissions are automatically deposited into my bank account when he pays me and will not match the amount on the 1099 income.

[TomD8]

In your situation, yes, the portion of the commission that you paid the Broker should be deducted on Line 10, Schedule C, as a commission.  Be aware that, if your Broker is an individual rather than a corporation, and the amount you paid him was $600 or more, you must file a 1099-MISC with the IRS (and a copy to him) to report the commission you paid him.  You may want to read this web reference on tax reporting of split commissions: <a rel="nofollow" target="_blank" href="https://www.nar.realtor/legal/irs-requires-reporting-of-cooperative-commissions">https://www.nar.rea...>

[Suzie2017]

What do you think about reporting it on Line 4, cost of goods?   I will read the publication, thank you!

[TomD8]

Reporting it on line 4 would be incorrect.  Additionally, if your Broker is going to continue reporting gross commissions on your 1099-MISC, you should request that he furnish you with Form W-9, to facilitate your preparation of his 1099-MISC.  Here's a link to that form:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/fw9.pdf">https://www.irs.gov/pub/irs-pdf/fw9.pdf</a>

[Suzie2017]

Interesting, my CPA said I could put it on Line 4 as I am having a issue with increasing my expenses on the Schedule C after all my years of not paying commissions on line 10.  I have a copy of his W-9 and it states he is a corporation.

[TomD8]

Line 4 is "Cost of Goods Sold."  Line 10 is "Commissions and Fees" paid to others by you.  You might also want to read this web reference, written by a CPA:  <a rel="nofollow" target="_blank" href="https://www.inman.com/2016/08/08/3-tax-deductions-all-agents-should-utilize-immediately/">https://ww...>
Also, what if you get audited (admittedly a remote possibility) and the IRS agent asks you, "What goods did you sell?"

[Suzie2017]

I'm trying to figure out the best way to avoid an audit.  Paying commissions has not been a part of my Schedule C and I actually didn't pay him, he took the $7,000 commissions before he paid me.   I see what your saying about the cost of goods.  I like to keep good records so I thought I needed to show how I paid him.   Thank you for your responses.

[TomD8]

If he took the $7,000 before he paid you, he should not have included it on your 1099-MISC.  But if he did, and your 1099-MISC shows the GROSS commission pre-split, then in the eyes of the IRS you received the gross commission and YOU paid HIM the $7000 split (which you can then deduct as a commission paid).  Be sure you write the check to his corporation (as shown on his W-9), not to him personally.

[Suzie2017]

OK.   Well that's pretty clear.  Thank you.    He took the funds already so no need to write a check,  and so I understand, I am not required to send a 1099 to his S Corp.

[TomD8]

Correct.  You do not issue a 1099-MISC to an S-Corp.

[natasha-alyse]

I am having the same issue/confusion. So we just record it on line 10 and that is all? No need to send a 1099 unless it is an individual? It seems odd. The Brokerage is claiming they paid me more than they did, so how does the IRS know they actually made a profit if I am not specifying to whom the commissions on line 10 were paid to (unless that is on line 10).

[TomD8]

The Brokerage's tax return is their responsibility.  See the "Exceptions" paragraph on page 2 of this IRS reference for the rules on issuing a 1099-MISC to corporations: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i1099msc.pdf">https://www.irs.gov/pub/irs-pdf/i1099msc.pdf</a>
Also see this:  <a rel="nofollow" target="_blank" href="https://payable.com/taxes/1099-misc-tax-basics">https://payable.com/taxes/1099-misc-tax-basics</a>