When it comes to running a business, freelancing, or selling creative work, understanding commissions, fees, and taxes is essential for success. The topic of “commissions, fees and taxes” covers everything from the commissions you pay to agents or platforms, the service fees tacked onto transactions, to the taxes you owe on your earnings. Whether you’re an artist selling on a platform, a freelancer invoicing clients, or a small business owner, these costs can impact your profits, pricing, and even your tax return. In this article, we’ll unpack the differences between commissions, fees, and taxes, look at how they’re calculated, and share real-world examples from creative industries and small businesses. By the end, you’ll know how to spot hidden costs, make smarter business decisions, and keep more of what you earn—all while staying on the right side of the IRS.
What Are Commissions?
A commission is a payment made to someone—like a sales agent, platform, or broker—for facilitating a sale or service. In creative fields, commissions often show up as a percentage of the sale price paid to a gallery, online marketplace, or agent. For example, an art platform might charge a 42.5% commission on every artwork sold, meaning if you sell a piece for $1,000, you keep $575 after the commission is deducted. In other industries, commissions can be paid to salespeople, real estate agents, or investment advisors for closing deals.
Key points about commissions:
- Usually calculated as a percentage of the sale price.
- Can be paid by the seller, buyer, or both, depending on the industry.
- Are considered a business expense and may be deductible for tax purposes.
What Are Fees?
A fee is a fixed charge for a specific service or transaction. Fees can be:
- Service fees: Charged by platforms, payment processors, or professionals for providing a service (e.g., a 3% credit card processing fee or a platform listing fee).
- Administrative fees: For paperwork, licensing, or permits.
- Rental or booth fees: Common in creative industries (e.g., a hairstylist paying a weekly chair rental fee).
Fees are typically transparent, but sometimes they’re bundled into the price or appear as “service charges” on invoices. Unlike commissions, fees are usually not tied to the value of a sale but are instead a set amount or percentage for a specific service.
What Are Taxes?
Taxes are mandatory payments imposed by governments on income, sales, or specific transactions. Taxes can include:
- Income tax: Paid on profits or earnings, whether you’re an employee, freelancer, or business owner.
- Sales tax or VAT: Added to the sale price of goods or services, often collected by the seller and remitted to the government.
- Special taxes and fees: Some industries or regions impose special taxes, like hotel taxes, tourism taxes, or arts funding surcharges.
Taxes are not optional and failing to pay them can result in penalties or legal trouble. The way taxes are calculated and collected can vary widely based on your location, business structure, and industry.
Commissions, Fees, and Taxes: Real-World Examples
| Scenario | Commission | Fee | Tax |
|---|---|---|---|
| Art sold on a platform | 42.5% of sale price to platform | 3% payment processing fee | 20% VAT on commission (UK) |
| Freelancer using Uber/Lyft | % of fare to platform | Booking/service fee | Income tax on net earnings |
| Restaurant bill | N/A | 15% service charge for large parties | Sales tax on total bill |
| Real estate sale | 5-6% to agent/broker | Closing/administrative fees | Property taxes, transfer taxes |
How Do These Costs Affect Your Business?
- Commissions reduce your take-home pay but may be worth it for the exposure or services provided.
- Fees can add up, especially if you use multiple platforms or payment processors. Always factor them into your pricing.
- Taxes are unavoidable but can be managed with good recordkeeping and planning. Deductible expenses, like commissions and fees, can lower your taxable income.
Tips for Managing Commissions, Fees, and Taxes
- Read the fine print: Always check for hidden fees or commission rates before signing up for a service or platform.
- Keep good records: Document all commissions, fees, and taxes paid—they may be deductible and help you track your true profit.
- Consult a tax professional: Especially if you have complex income streams or work in multiple states/countries.
- Price accordingly: Build expected commissions, fees, and taxes into your pricing so you’re not caught off guard.
FAQs
Q: What’s the main difference between a commission and a fee?
A: A commission is usually a percentage of a sale paid for facilitating a deal, while a fee is a set charge for a specific service.
Q: Are commissions and fees tax-deductible?
A: Yes, if they’re business-related, both commissions and fees can generally be deducted as business expenses on your tax return.
Q: Who pays taxes on commissions?
A: Employees have taxes withheld by their employer, while independent contractors must pay taxes themselves, including income and self-employment tax.
Q: How can I avoid surprise fees or commissions?
A: Always review contracts, platform terms, and invoices carefully, and ask questions about any charges you don’t understand.
Understanding commissions, fees, and taxes is key to running a profitable and stress-free business—so keep these tips handy, and you’ll be ready for whatever the financial world throws your way!