Commissions and Fees on Schedule C: Line 10, 1099-NEC, and Limits

Line 10 of Schedule C is where you report commissions and fees you pay to non-employees whose work directly generates sales or revenue for your business. These are payments to outside agents, brokers, referral partners, and intermediaries, and the total you enter reduces both your income tax and your self-employment tax.¹ The same payment can plausibly land on three or four different Schedule C lines depending on what it was actually for, so the sorting matters.

What Belongs on Line 10

The IRS instructions are short: enter the total commissions and fees for the tax year, and leave out anything that is capitalized or deducted elsewhere.² The recipient has to be someone you do not treat as a W-2 employee.

A commission is usually a percentage tied to the value of a sale. A fee is usually a flat amount paid for facilitating a specific transaction or referral. Both share one defining trait: a direct link between the payment and income your business earned or expects to earn. Common examples:

Referral fees paid to an outside partner who sends a paying client your way.
Broker commissions paid to a real estate broker for securing a commercial lease, or to a sales agent for closing deals on your behalf.
Finder’s fees paid to someone who connects you with a specific business opportunity that produces revenue.

Every one of these has to clear the “ordinary and necessary” standard: common in your line of work and helpful to your business.³ A payment that fails either prong is not deductible on any line of Schedule C.

One point of confusion worth clearing up: if your business earns commission income (you are the agent being paid), that money is gross receipts and goes on Line 1. Line 10 is only for commissions you pay out.

Online Platform and Marketplace Fees

If you sell on Etsy, eBay, Amazon, or a similar marketplace, the transaction and selling fees those platforms charge generally go on Line 10. The platform is functioning as an intermediary that facilitates each sale in exchange for a cut, which fits the Line 10 category even though no individual person is receiving the money. Payment processing fees charged by the same platforms fit here too.

Promoted listings and paid advertising features on those platforms are a different matter. Those costs belong on Line 8 (Advertising), because they buy visibility rather than facilitate a specific completed transaction.

Payments That Belong on a Different Line

Misclassifying between Schedule C lines does not change your bottom line, but it does misstate your expense mix. Three lines absorb payments that are easy to confuse with commissions.

Contract Labor (Line 11)

Line 11 is for non-employees who do operational work: a freelance web developer building your site, an IT consultant maintaining your servers, a contractor who helps you deliver your product or service. Line 10 is for people who bring in customers or close sales.²

Legal and Professional Fees (Line 17)

Accountants, tax preparers, attorneys, and bookkeepers go on Line 17. These are advisory and compliance services, not sales-related payments. A tax preparer who files your return belongs on Line 17; a broker who lands you a new client belongs on Line 10.²

Advertising (Line 8)

Line 8 covers the cost of reaching potential customers broadly: digital ads, print media, flyers, marketing campaigns. You pay for advertising whether or not a sale happens. You pay a Line 10 commission because a sale happened.

When Commissions Must Be Capitalized Instead

Not every commission gets an immediate deduction. When you pay a commission to acquire a long-term business asset, the cost goes into the asset’s basis rather than onto Line 10. You recover it over time through depreciation, or when you sell the asset.⁴

Real estate is the classic case. A broker’s commission on a commercial building you buy for your business becomes part of the building’s cost basis. The same rule applies to commissions on stocks, bonds, or other investment property; settlement fees and sales commissions are specifically identified as costs that must be included in basis.⁴

The Schedule C instructions reinforce this: commissions paid to facilitate the sale of property generally have to be capitalized unless you are a dealer who regularly sells that type of property in the ordinary course of business.¹ A house flipper deducts broker commissions on Line 10. A business owner who buys one building to use as an office adds them to the building’s basis.

Commissions You Cannot Deduct

Some payments that look like deductible commissions are off limits entirely.

Personal expenses do not qualify. A commission paid on the sale of your personal residence is not a business expense and does not belong on Schedule C at all. Fees tied to personal investments outside your trade or business are the same.

Bribes and kickbacks to government officials, domestic or foreign, are flatly disallowed. Illegal kickbacks to private parties are also non-deductible when the payment subjects you to a criminal penalty or the loss of a business license under a generally enforced state law. The regulations define a kickback to include payments made in exchange for the referral of a client, patient, or customer.⁵

Healthcare referral payments carry a separate rule. Kickbacks and rebates connected to services paid for under Medicare or Medicaid are non-deductible regardless of whether they are technically illegal, applying to any provider, supplier, or physician who makes or receives such payments in connection with covered items or services.⁵

When to Take the Deduction

Timing depends on your accounting method, and you have to apply the same method year after year.⁶

On the cash basis, you deduct the commission in the tax year you actually pay it. A commission your agent earned in December but received in January belongs on next year’s return. The date the money leaves your account controls.

On the accrual basis, you deduct the commission when two conditions are met. The all-events test must be satisfied, meaning the obligation is fixed and the amount can be determined with reasonable accuracy, and economic performance must have occurred, which for services means the work has actually been performed.⁷ A deal your sales agent closes in December, with a commission you can calculate, is deductible that year even if the check goes out in January.

Most sole proprietors use the cash method because it is simpler and tracks actual cash flow. If you are not sure which you use, check how you filed last year. Switching methods requires IRS approval.

Reporting the Payments on Form 1099-NEC

Deducting a commission on Line 10 often triggers a reporting obligation. Form 1099-NEC tells the IRS about the payment so the recipient reports the income on their own return.⁸

The Reporting Threshold

For tax year 2026, you must issue a 1099-NEC to any non-employee you paid $2,000 or more during the calendar year. The threshold rose from $600 and will be adjusted for inflation starting in 2027.⁹ The $2,000 is cumulative across the year, not per transaction.

Payments to corporations are generally exempt. Before you pay a commission, collect a Form W-9. It gives you the recipient’s Taxpayer Identification Number and tells you whether they are a corporation, LLC, sole proprietor, or something else, which is how you know whether a 1099-NEC is required.

Payments Through Credit Cards and Payment Platforms

If you pay a commission by credit card or through a third-party payment network like PayPal, you generally do not need to issue a 1099-NEC. The payment processor handles reporting on Form 1099-K once the recipient’s total payments through that platform exceed $20,000 and 200 transactions in a calendar year.¹⁰ If you pay by check, ACH, or cash, the 1099-NEC obligation stays with you.

Deadline and Penalties

The 1099-NEC is due to both the IRS and the recipient by January 31 of the year after payment. Late filing penalties escalate with how late you are. For returns due in calendar year 2026, the per-return amounts are:¹¹

$60 per return if corrected within 30 days.
$130 per return if corrected after 30 days but by August 1.
$340 per return if filed after August 1 or not filed at all.
$680 per return for intentional disregard, with no maximum cap.

Small businesses with gross receipts of $5 million or less get lower annual caps on total penalties, but the per-return amounts are the same. A handful of unfiled 1099s adds up fast.

What the Deduction Is Actually Worth

Every dollar on Line 10 does double duty. Your Schedule C net profit carries to Schedule SE, where it becomes the basis for self-employment tax.¹ The self-employment tax rate is 15.3%, covering Social Security (12.4%) and Medicare (2.9%). For 2026, the Social Security portion applies to the first $184,500 of net self-employment earnings.¹² Medicare has no cap.

A $5,000 commission on Line 10 saves you income tax plus roughly $765 in self-employment tax (15.3% of $5,000). You can also deduct half of your total self-employment tax on Schedule 1, which further reduces adjusted gross income. The cascade is worth more than people assume, which is why careful tracking of what belongs on Line 10 pays off.

1
Internal Revenue Service. Instructions for Schedule C (Form 1040) (2025)
2
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
3
Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
4
Internal Revenue Service. Basis of Assets
5
eCFR. 26 CFR 1.162-18 – Illegal Bribes and Kickbacks
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Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods
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eCFR. 26 CFR 1.461-4 – Economic Performance
8
Internal Revenue Service. About Form 1099-NEC, Nonemployee Compensation
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Internal Revenue Service. 2026 Publication 1099 – General Instructions for Certain Information Returns
10
Internal Revenue Service. Understanding Your Form 1099-K
11
Internal Revenue Service. 20.1.7 Information Return Penalties
12
Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security