How do I handle commission splits in my bookkeeping?
The fundamental question is whether to record gross commission or only your net portion. The answer is almost always gross. You receive the full commission, then you pay out the split. Those are two separate transactions and should be recorded that way.
Say you close a deal that generates a $10,000 commission. You keep $7,000 and your team member or referring agent gets $3,000. Record $10,000 as commission income. Then record $3,000 as commission expense when you pay it out. Your profit and loss shows the full picture of money flowing through your business.
Recording only your net $7,000 creates problems. Your revenue looks lower than it actually is. You have no documentation of the payout. When tax time comes, you can’t prove you paid that $3,000 to someone else. The IRS sees deposits that don’t match your reported income and starts asking questions.
Set up your chart of accounts to handle this properly. Create an income account for gross commissions received. Create an expense account for commissions paid out. If you split with multiple people regularly, consider sub-accounts or classes to track who gets what. This detail matters when you’re issuing 1099s at year end.
In QuickBooks, record the full commission when you receive it or when the closing statement shows the amount. When you pay out the split, record it as an expense to your commissions paid account. If you’re using the accounts payable feature, you can track splits owed but not yet paid, which helps with cash flow awareness.
Real estate professionals deal with this constantly. Agents split with brokerages, team leads, transaction coordinators, and referring agents. The closing statement might show multiple disbursements, but the accounting principle stays the same. Your portion and the portions going elsewhere should all be visible in your books.
Track each person or company you pay commissions to throughout the year. Anyone who receives $600 or more needs a 1099-NEC from you by January 31. If you only recorded net income, you have no records to generate those 1099s. You’re either scrambling to recreate data or skipping compliance and hoping nobody notices.
Timing matters too. Record income when earned, not just when deposited. If a deal closes December 28 but funds don’t hit your account until January 5, that’s still December income. Same with the expense. If you owe a split from December but pay it in January, the expense hits when you pay unless you’re on accrual accounting.
Common mistakes include dumping commission expenses into a generic “contract labor” category, forgetting to track recipient details, and waiting until year end to sort it out. These shortcuts create more work later and increase the chance of errors that affect your tax return. Small business tax preparation goes smoother when the underlying records are clean.
If commission splits are a regular part of your business, build the tracking into your weekly routine. Record splits as they happen. Keep recipient W-9s on file. Reconcile your commission paid account monthly. The system doesn’t need to be complicated, but it does need to be consistent.
The Treasure Valley's Tax and Accounting Team
The Next Step:
A Short Conversation
Tell us what you're dealing with. We'll listen, answer your questions, and give you a straightforward quote.
More Questions
What is a chart of accounts in QuickBooks?
A chart of accounts is the complete list of categories QuickBooks uses to organize your transactions. It groups everything into assets, liabilities, equity, income, and expenses so your financial reports make sense.
Read answerShould I use QuickBooks or hire a bookkeeper?
This isn't an either/or choice. QuickBooks is software, and a bookkeeper is a person who knows how to use it. The real question is whether you maintain your own books or pay someone to handle it for you.
Read answerWhat records should restaurants keep for tax purposes?
Restaurants need to keep income records including POS reports and tip documentation, expense receipts and invoices, payroll records, and inventory counts. The IRS typically wants three to seven years of documentation depending on the record type.
Read answerWhat is the Qualified Business Income (QBI) deduction?
The QBI deduction lets eligible business owners deduct up to 20% of their qualified business income from their taxable income. It applies to pass-through entities like sole proprietorships, partnerships, S corporations, and most LLCs.
Read answerWhat business expenses are tax deductible?
Most expenses you incur to operate your business are deductible. The IRS uses a simple test: the expense must be ordinary and necessary for your type of business. The key is tracking everything properly and knowing the rules for specific categories.
Read answerHow do I respond to an IRS notice or letter?
Most IRS notices are routine correspondence that require a timely written response. Read the notice carefully, gather supporting documentation, and respond by the deadline. For complex issues or audits, an Enrolled Agent can represent you before the IRS.
Read answer
