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I earn most of my income through a freelancing website which charges a "service fee" (their terminology) on all income I earn through the site. The website acts as the intermediary during payment and deducts their percentage before transferring the funds to me.

The site sent me a 1099-K for the 2016 tax year. The 1099-K reflects my gross income for the year - in other words, what my clients paid before the site deducted its service fee.

Obviously I will want to deduct the service fee as a business expense. What I'm confused on is which line of Schedule C to enter the deduction on. My impression is that it probably falls under line 10 ("commissions and fees") or line 17 ("legal and professional services"), but the vague descriptions from the IRS aren't helping me decide which one is more applicable.

Which line on Schedule C is most appropriate for entering a service fee that was charged on my gross income before I received that income?

(Note: While researching this on the web, I found that a common suggestion for this situation was to disregard the 1099-K and only enter your net income [after the service fees] on Schedule C Line 1. However, since I received the 1099-K, I'd rather be more explicit and enter the gross income and deductions).

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Putting them on line 10 is best suited for your situation. According to Quickbooks:

Commissions and Fees (Line 10)

Commissions/fees paid to nonemployees to generate revenue (e.g. agent fees).

It seems like this website you are using falls under the term "nonemployees".

  • Yes. I would definitely NOT ignore the 1099 and just report the net value on your Schedule C. The company is required to send the 1099 information to the IRS and the IRS compares this to what you put on your return. If the 1099 says you made, whatever, say $10,000, but you put your income on your Schedule C as just $8,000 (because they deducted $2,000 as their cut), the IRS's computers will quickly see the discrepancy and I think your chance of being audited will be high. – Jay Mar 17 '17 at 20:12

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