Referral Fees You Receive Are Taxable Income
Any referral fee you collect for sending a buyer or seller to another agent counts as ordinary business income, no different from a commission check. It gets reported on Schedule C as part of your gross receipts, and it's subject to both income tax and self-employment tax (15.3 percent under Schedule SE) since nothing was withheld.
The agent or brokerage paying you the referral fee is required to send you a 1099-NEC if the total paid to you during the year is 600 dollars or more. But the reporting threshold only affects their paperwork obligation, not yours. If you get a 500 dollar referral fee and never see a 1099, you still have to report it. The IRS expects you to track and declare all income, not just the income that shows up on a form.
A common mistake agents make is treating referral fees as a side perk they can leave off their return because the amount feels small compared to their GCI. Every referral fee adds to your total gross income and, since there's no withholding on any 1099-NEC money, it also adds to what you owe in estimated quarterly taxes.
Referral Fees You Pay Are Deductible
If you're the one paying a referral fee (for example, sending a past client's out-of-state purchase to another agent and paying them a cut of your commission), that payment is a legitimate business expense. You deduct it on Schedule C, which lowers your taxable income for the year.
Here's where agents get tripped up: many only look at their net commission check after the brokerage has already deducted the referral fee, splits, and transaction fees, and they assume that net number is what they report. It's usually cleaner and more accurate to report the full gross commission as income and then separately deduct the referral fee, broker split, and any transaction fees as business expenses. This gives you a paper trail that matches what the brokerage reports on your 1099-NEC (which is often based on gross commission before deductions), and it avoids a mismatch that can trigger an IRS notice.
If you pay a referral fee of 600 dollars or more to another individual agent (not a brokerage) during the year, you may be required to issue them a 1099-NEC yourself.
Keep the Paper Trail
Because referral fees often get netted out inside a single commission disbursement, they're easy to lose track of at tax time. For each closing where a referral fee was involved, save:
- The referral agreement (who's owed what percentage)
- The closing statement or commission disbursement showing the fee
- Any 1099-NEC issued to you or by you related to the fee
Matching your gross commission income against every referral fee, broker split, and transaction fee paid on that same deal is the only way to know what a closing actually netted you, and it keeps your Schedule C accurate if the IRS ever asks why your reported income doesn't match your 1099 totals.