Sole Proprietorship Gross Income vs Expenses

[mercurynfo]

My wife runs a SP teaching Zumbini and Zumba classes.  She uses 3rd party payment apps like PayPal, Venmo, etc., has split fees with someone who helps to capture business for her (a non-employee) and pays franchise fees to the two companies.  Question is this, if fees are deducted from PayPal or some other payment processing website, prior to her getting her share, is that a deductible expense?  Or does she claim the net proceeds from PayPal as her gross income?  This is a very confusing topic for which there are few resources that clarify including IRS Pub 535.

The way my wife thinks about this is that the true full amount (including all fees) are her gross income and despite the fact that others' (franchises, intermediaries, 3rd party payment apps) take their share before she gets  her share that these are still expenses.  My position, which may be overly conservative, is that IRS only cares what she ultimately gets from the payment apps and that net figure is her gross income.  Since she doesn't actually pay the fees from her net pay (they are pre-deductions) those are not really expenses.  Who is correct?  

Please help!

[VolvoGirl]

Either way.  It works out the same.   See how the 1099 forms they might send show it.  If she knows all the amounts I would be inclined to enter the total income before fees and then expense the fees.

[VolvoGirl]

Oh for someone she splits or pays.....

You need to give a 1099NEC (previous a 1099Misc) to anyone you paid $600 or more to for the year. But not to corporations or for merchandise. You send the IRS a copy of the 1099Misc with the transmittal summary form 1096. These are due to the person by Jan 31 and to the IRS by Jan 31 also.

Starting in 2020 they added a new 1099NEC form to replace the 1099Misc.  If you are using the Online Self Employed version or Desktop Home & Business program or Business program you can use Turbo Tax to prepare the 1099.

That is Contract Labor on Schedule C line 11.

[mercurynfo]

Unfortunately, Zumbini and Zumba do not send out 1099s at the end of the year.  I'm left with my wife's reports from PayPal, Venmo, and a couple other 3rd party sites.  We basically add all of them up over the year.  A 1099 would be nice and neat-- IRS gets this and identifying a specific figure for income is straight forward.

[mercurynfo]

Ok, thanks for the info on 1099-NEC vs 1099-MISC, good to know.

The deduction in question is a fee sharing percentage that my wife pays to another franchisee who has a bigger follower base than my wife's.  My wife negotiated with this other franchisee 30% of the client charges if a new client registers for classes on that other person's Zumbini webpage.  98% of the time, my that other Zumbini franchisee takes her 30% before my wife gets the balance. 

I suppose either way results in approximately the same result but what does the IRS expect me to do?  That is the question.  What is my wife's gross?  Net of fees income?  Or all income including all fees paid?