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TBauer
January 2, 2025
Question

Categorize advance commission payments so the advance is reportable on 1099-NEC and how it is categorized by our company for tracking and expensing

  • January 2, 2025
  • 2 replies
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Our company is on cash basis accounting and pays our Independent Contractors an advance on their commission each month.  When receive the money from our customer the independent contractor earns the commission.  The amount of the commission earned is deducted from the advance each month.

 

How should these transactions be categorized so that the advanced amount is reported on the 1099-NEC form for the Independent Contractor and reported as a Contractor expense for the company - AND - show the amount not earned as an recoverable asset on the BS?

 

For Tracking Purposes:

The monthly advance payment is categorized as a recoverable asset.

A bill is created for Commission earned (commission expense) and is paid (when earned) with a credit memo from the advanced commission account.

 

What happens is the Commission expense which is what is reported on the 1099 does not include the advanced payments although they are considered income to the Independent Contractor.  The advanced payments made by our company that have not been earned are not being reported as a commission expense therefore not deductible for tax purposes.

 

What is the correct entry for this so that the advanced payments received by the Independant Contractor are reported on their 1099 AND the advanced payments paid out are reported as an expense for our company all the while tracking the amount of commission earned and amount that remains recoverable?

    2 replies

    FishingForAnswers
    FishingForAnswers
    January 8, 2025

    @TBauer  Bumping this because I'm interested in the answer, but also to clarify something in your situation.

     

    That is, I didn't notice you mention anywhere how you're paying this contractor.

     

    If you are paying by check or cash, that's fine.

     

    If you're paying them electronically, these payments shouldn't be going on a 1099-NEC regardless; the contractor should have a merchant provider, and said merchant provider will handle the reporting of this income themselves via a 1099-K in the contractor's name.

    Rainflurry
    Rainflurry
    January 8, 2025

    @TBauer 

     

    "What happens is the Commission expense which is what is reported on the 1099 does not include the advanced payments although they are considered income to the Independent Contractor."

     

    Did you receive guidance from a good CPA or tax attorney on this?  A 1999 ruling in the case of Gales, James J., et ux. v. Comm. ruled that advance commissions received under an obligation to repay them on demand are considered loans and, as such, not items of gross income to the contractor.  

     

    Just so I understand, are you trying to record the full advance amount as an expense to the company and 1099 income to the contractor as of the date the advance is made?  Then, once the commission is earned, you want to record the amount of the advance that is still unearned as a recoverable asset on the balance sheet without reducing the full advance amount already paid to the contractor for 1099 purposes or your company's expense?

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