How do I deal with income earned from commissions or referral fees?

Understanding commission and referral income

Commission and referral income is money you earn for helping a sale, introducing a client, or driving a lead that results in a transaction. It can show up in lots of everyday situations: affiliate links on a blog or social media, a referral bonus from a software company, a finder’s fee for connecting a contractor with a customer, a sales commission from a job, or a one-off payment for introducing an investor to a startup. Sometimes it’s paid as cash, sometimes as store credit, gift cards, free products, discounts, points, or even cryptocurrency. However it arrives, it’s generally treated as income, and it usually creates tax and record-keeping responsibilities for you.

People often get tripped up because commission or referral fees feel “small” or “informal,” especially if they’re paid through a platform. But tax and compliance rules typically focus on what the payment is for, not whether it feels like a job. If you earned something of value because you promoted, referred, introduced, or sold, you usually need to treat it as income and handle it accordingly.

Start by classifying what kind of income it is

Before you decide what to do, clarify the nature of the relationship and the activity that generated the payment. The same dollar amount can be treated differently depending on context. Here are the most common categories:

1) Employment commissions. If you work for a company as an employee and your pay includes commissions, the employer usually handles withholding and reporting through payroll. Your commission is still taxable income, but the reporting is typically built into your pay statements and year-end forms.

2) Self-employment income (independent contractor or sole trader). If you earn commissions or referral fees outside an employment relationship, you’re often treated as self-employed for that income. This is common with affiliate marketing, sales consulting, independent real estate lead generation, or referral arrangements where you aren’t on payroll.

3) Hobby or casual income. Some people argue that sporadic referrals are a “hobby.” In many jurisdictions, even hobby income can be taxable, though the ability to deduct expenses may be limited and the rules can be strict. The bigger issue is that repeated, organized, profit-motivated activity often stops being considered “casual” and starts looking like a business.

4) Business income through a company. If you operate through a limited company, LLP, LLC, or similar structure, the commission may belong to the entity rather than you personally, depending on contracts and how you invoice and receive the money.

5) Other income types. Occasionally, a payment might be treated as a rebate, discount, or price reduction rather than income. But if you’re being paid for performance—sales, referrals, leads, introductions—it usually leans toward income.

If you’re unsure, a practical rule of thumb is: if the payment is compensation for a service you provided (promoting, introducing, persuading, or selling), treat it as income and handle it like you would any other compensation.

Know what counts as “income” (it’s not just cash)

Many people forget that non-cash benefits can still be taxable. If you receive value in exchange for your referral or commission activity, it may still need to be accounted for:

Cash and bank transfers: straightforward income.

Gift cards and vouchers: often treated like cash equivalents.

Free products or services: commonly treated as income equal to their fair market value.

Discounts and credits: sometimes treated as income, especially if you can use them broadly or convert them to cash-like value.

Points or rewards: depends on the program and local rules, but if earned specifically as compensation, they may need reporting.

Crypto or tokens: typically treated as income at the value received, and later gains/losses can arise if the value changes before you dispose of it.

The most important habit is to record the value on the date you earn or receive it, not weeks later when you remember.

Separate the “earning event” from the “payment event”

Commission and referral arrangements can have a time gap between when you did the work and when you get paid. You might post a link in January, the customer buys in March, and you get paid in April. Some programs pay after return windows close, or only once a threshold is hit. This creates two key questions:

When did you earn the income? That could be when the sale occurred, when the platform confirms the commission, or when the payment becomes due.

When did you receive the income? That’s when money or value hits your account, wallet, or is made available to you.

Different accounting methods handle this differently. Many individuals use a simple cash basis: you record income when you receive it. Some businesses, especially larger ones or those using accrual accounting, recognize income when it’s earned. If you’re not sure which you should use, default to a simple system that matches your local rules and stays consistent. Consistency matters: switching methods can create errors, double counting, or missing income.

Set up a simple record-keeping system (and stick to it)

If you do nothing else, do this: create a spreadsheet or bookkeeping app workflow that captures every commission or referral payment. A workable system can be extremely simple. The goal is to be able to answer three questions at any time: how much did I earn, when did I earn it, and what expenses did I incur to earn it?

At minimum, track:

Date received (and optionally date earned if it differs).

Payer/platform (company name, affiliate network, client, etc.).

Description (e.g., “Affiliate commission: Product X,” “Referral fee: client introduction,” “Sales commission: contract ABC”).

Gross amount (before fees or chargebacks).

Fees withheld (platform fees, processing fees).

Net amount received (what you actually got paid).

Currency (if foreign currency is involved).

Payment method (bank transfer, PayPal, card, gift card, crypto).

Invoice/reference ID (if any).

Notes (returns, clawbacks, dispute, delayed payment).

Also save source documents: platform statements, payout confirmations, invoices you issued, contracts, and bank or wallet records. If you ever need to prove what happened, you’ll want more than “I think it was around £300.”

Understand gross vs net: fees, chargebacks, and clawbacks

Affiliate and referral platforms often show a “commission earned” figure and then subtract fees, refunds, or chargebacks. You might see a £100 commission that later becomes £70 after returns. Some arrangements include clawbacks months later. This is normal in the industry but can be messy for accounting.

A clean approach is to track both gross and net. Record the gross commission when it is confirmed or paid (depending on your accounting method), and separately track any reductions (fees, refunds, clawbacks) when they occur. This gives you a transparent trail and avoids confusion if a platform changes its reporting dashboard.

In practical terms, you want to avoid two mistakes: (1) only recording the net and later forgetting you paid platform fees that might be deductible, or (2) recording the gross and never recording the clawbacks, which inflates income.

Plan for tax: set aside money as you go

A common shock for first-time commission earners is discovering that nobody withheld tax for them. If your referral income is treated as self-employment or business income, you may need to pay tax yourself—sometimes in installments. The safest habit is to set aside a percentage of every payout into a separate account the same day you receive it.

How much should you set aside? It depends on your total income, tax bands, and whether you also owe social contributions. If you don’t know your exact rate, choose a conservative percentage so you’re not caught short. The key is not perfection; it’s creating a buffer.

If you earn in multiple currencies or through multiple platforms, the “set aside” habit becomes even more important because small amounts add up and the year-end total can be bigger than you feel day to day.

Know when you might need to register or formalize a business

Many people start with “just a few referrals,” then it turns into a steady side income. At some point, you may need to register as self-employed, a sole trader, or a business entity, depending on your local rules and thresholds.

Indicators that you are operating as a business include:

You actively market or promote offers.

You have recurring income and a profit motive.

You keep records and reinvest in tools, ads, content, or a website.

You have contracts, invoices, or a branded presence.

You spend significant time on it, like a part-time job.

Formalizing can bring benefits (clearer deductions, credibility, access to business banking) but also responsibilities (registrations, returns, compliance, separate bookkeeping). If your commission income becomes meaningful or regular, it’s worth treating it like a business from day one to avoid messy “catch up” work later.

Invoices, contracts, and who is the customer

One of the confusing parts of referral income is that the “customer” isn’t always obvious. You might refer a friend to a service provider, but the provider pays you. Or you might be paid by an affiliate network that aggregates multiple brands. Understanding who pays you and under what contract is essential.

Ask yourself:

Who is paying me? The brand, the network, the client, or a third-party platform?

What is the agreement? Terms of service, affiliate agreement, referral contract, or a written introduction agreement?

Do I need to issue an invoice? Some payers require invoices; others won’t accept them and treat payouts as automated platform payments.

Is tax withheld at source? Some platforms or countries apply withholding tax, particularly for cross-border payments.

Even if you never negotiate a bespoke contract, keep a copy of the affiliate or referral terms that applied at the time. Platforms update terms frequently; your obligations and commission rates can change.

VAT, sales tax, and indirect tax considerations

Commission and referral income can intersect with VAT or sales tax rules, especially if you are effectively providing marketing or intermediary services. Whether you must register for VAT/sales tax depends on where you are, your turnover, and whether the service is considered taxable and where it is supplied.

Key points to think about:

Turnover thresholds: Many systems require registration once taxable turnover exceeds a threshold over a period.

Place of supply: If you promote a company in another country, the rules may treat the service as supplied where the customer is located, which can affect how you invoice.

Digital services: Affiliate marketing is often a service, not a product sale by you, but the classification can still affect VAT treatment.

Platforms: Sometimes the platform is considered the supplier of services to the brand, and you are supplying services to the platform. This can affect invoicing and VAT.

If your commission income grows, indirect tax becomes more relevant. Many people only think about income tax and then get surprised by VAT obligations. Keeping an eye on turnover and understanding how your jurisdiction treats services is a smart preventative step.

Deducting expenses: what you can usually claim (and what to watch)

If your commission or referral income is business/self-employment income, you may be able to deduct expenses that are wholly and exclusively for earning that income (exact wording varies by jurisdiction). This is where careful record-keeping pays off.

Common potentially deductible expenses include:

Platform fees and payment processing fees: affiliate network fees, PayPal fees, bank charges tied to payouts.

Website and hosting costs: domain names, hosting, themes, plugins, maintenance.

Content creation tools: editing software, stock assets, microphones, cameras (sometimes as capital items), subscriptions.

Marketing and advertising: paid ads, email marketing services, landing page tools.

Professional services: accountant fees, legal advice for contracts, bookkeeping subscriptions.

Office costs: a proportion of home office expenses if allowed, stationery, phone and internet (business portion).

Travel and meetings: if you travel to build the referral relationship or create content (subject to local rules).

Watch-outs:

Mixed-use items: phones, laptops, cars, internet. You may need to apportion between personal and business use.

Capital vs current expenses: Some items must be capitalized and written off over time rather than deducted immediately.

Entertainment rules: Meals and entertainment deductions can be restricted or disallowed depending on where you are.

The cleanest approach is to treat your referral activity like a small business: keep receipts, note the business purpose, and store them in an organized way.

Cross-border commissions: foreign currency, withholding, and double taxation

Referral and affiliate income is often international. You might live in one country and promote a company headquartered in another, paid through a platform in a third. This can introduce three recurring issues:

1) Currency conversion. Decide what exchange rate method you’ll use when recording income in your “home” currency. Some people use the rate on the date of receipt; others use the rate on the date earned. Consistency is crucial.

2) Foreign withholding tax. Some payers withhold tax before paying you, depending on tax treaties, forms you submit, or default rules. Keep records of withheld amounts and any statements showing it.

3) Double taxation relief. If tax is withheld abroad, your home country may allow a credit or relief, but you usually need documentation. Without paperwork, you might end up paying twice.

International commission income is not automatically “too complicated,” but you must be disciplined about documentation: statements, forms, and exchange rates. If you ignore it, it becomes painful at year-end.

Dealing with irregular payments and thresholds

Many platforms only pay out once you reach a minimum threshold. That means you could earn small commissions throughout the year but receive a lump sum payment later. Don’t let that delay trick you into forgetting earlier activity. Keep a running log of commissions as they accrue if the platform provides it, or at least reconcile payouts to the platform’s earnings statements.

Irregular income also affects budgeting. A good strategy is to calculate your average monthly commission over a rolling period (like the last six months) and treat that as your baseline. When you have a “big month,” resist the urge to assume it will happen every month. Commission income can fluctuate due to seasonality, algorithm changes, product availability, competition, and platform rule changes.

Handling refunds and negative balances

Refunds can create situations where you owe money back to a platform or your balance goes negative. This happens when commissions were paid out and then the underlying sale is reversed, or when fraud is detected. Your records should reflect this reality.

Practical ways to handle it:

Track negative adjustments explicitly: create a line item for “chargeback” or “commission reversal” rather than overwriting the original income.

Reconcile monthly: compare your bank deposits to platform statements so you spot reversals promptly.

Keep an audit trail: platforms can remove transactions from dashboards after a period; exporting reports periodically protects you.

The goal is to ensure your reported income reflects what you ultimately kept, and that you can explain discrepancies if asked.

Compliance and legal considerations beyond tax

Commissions and referral fees don’t exist only in the tax world. Depending on the industry, there may be regulatory or contractual rules about referral arrangements. Some sectors—finance, insurance, real estate, healthcare, legal services—can have strict rules about referral fees, licensing, disclosure, and inducements. Even in less regulated sectors, platform terms can prohibit certain promotional practices.

To protect yourself:

Read the program terms: especially around prohibited traffic sources, disclosure requirements, and payout conditions.

Disclose transparently: many jurisdictions require clear disclosure when you earn commission from recommendations.

Avoid restricted sectors without guidance: if referral fees touch regulated advice or licensing requirements, get professional advice.

Protect data: if you are collecting leads, ensure you comply with privacy and marketing consent rules.

Good compliance habits reduce the risk of clawbacks, bans, disputes, or legal trouble.

Disclosure and trust: treating commissions ethically

Even when disclosure is a legal requirement, it’s also a practical trust-building tool. People are more likely to take your recommendations seriously when you’re transparent about how you get paid. Clear disclosure also reduces reputational risk: no one likes feeling “sold to” without knowing it.

Ethical habits include:

Only promoting products you genuinely believe fit your audience.

Explaining pros and cons instead of only hype.

Avoiding deceptive urgency or misleading claims.

Being upfront about affiliate links and referral incentives.

Separating editorial content from pure promotional content when possible.

In the long run, the most durable commission income usually comes from credibility, not clever tricks.

Payments through third-party apps: PayPal, Stripe, and marketplaces

Many people receive referral money through PayPal, Stripe, marketplace wallets, or creator platforms. It’s tempting to treat these as “not real income” because they aren’t your bank account. That’s a mistake. Payment intermediaries are still payment methods, and platforms often provide transaction histories that can be used to verify income.

Best practice is to reconcile these accounts the same way you reconcile a bank account. Download statements regularly and keep them with your records. If you transfer money from PayPal to your bank, remember that the transfer is not new income—it’s just moving money you already earned. The income occurred when you received it in PayPal (or when it became available to you, depending on rules).

Keeping business and personal money separate

You don’t need a fancy setup to separate business and personal finances, but separation makes life dramatically easier. Even if you’re operating as an individual, consider using:

A separate bank account for commission/referral income.

A separate card for business expenses.

A separate PayPal or platform wallet (where possible).

This separation simplifies bookkeeping, makes tax filing easier, and helps you see whether the activity is truly profitable once expenses are included.

What to do if you didn’t track income properly in the past

It’s common to realize late that you should have tracked commission income more carefully. Don’t panic. The practical move is to reconstruct as best you can using the records that exist.

Steps to clean it up:

1) Gather source data. Download payout reports from affiliate networks, export transaction histories from payment apps, and pull bank statements.

2) Create a timeline. Build a spreadsheet listing every payout and the period it relates to, if known.

3) Identify missing months. Compare platform earnings to actual deposits to find gaps.

4) Separate gross and adjustments. Note refunds, chargebacks, and fees separately when possible.

5) Estimate carefully where needed. If some details are missing (like the exact fee breakdown), use reasonable estimates and note your method. Avoid guessing wildly; conservative accuracy is your friend.

6) Improve going forward. Set a monthly reminder to export reports and reconcile.

Once you’ve reconstructed, you can determine whether you need to amend past filings, disclose additional income, or simply fix the process for the current period. If the amounts are significant, professional advice can prevent compounding mistakes.

How to handle commission income if you have a day job

If you earn commissions outside your employment, you can end up with a combination of taxed salary and untaxed side income. That mix can change your overall tax position, including the rate applied to your side income.

Practical habits when you have both:

Keep your side income separate. This helps you see how much you’re earning and what you can set aside for tax.

Don’t assume your employer’s withholding covers everything. Withholding is based on your employment income, not your side commissions.

Track deadlines. If your jurisdiction requires self-assessment or estimated payments, missing deadlines can create penalties.

Review your tax band. A side income that pushes you into a higher band can change how much you should reserve.

Think of it as running a small enterprise alongside your job. Simple structure prevents painful surprises.

Common myths that cause trouble

Myth: “It’s only a few hundred, so it doesn’t count.” Small amounts can still be taxable or reportable, and they add up over time.

Myth: “If I don’t get a tax form, it isn’t income.” Reporting forms are administrative tools, not definitions of income.

Myth: “If it’s paid as a gift card or free product, it’s not income.” Value received for services can still be income.

Myth: “It’s a hobby, so I can ignore it.” Even hobbies can have tax consequences, and repeated profit-seeking activity may be treated as business.

Myth: “If I move it between accounts, I can count it later.” Transfers aren’t income; they can confuse your records if you aren’t careful.

Building a routine: monthly and yearly checklists

Commission income becomes manageable when you treat it like a routine rather than a scramble. A simple cadence can keep everything under control.

Monthly routine:

Download or export platform earnings and payout statements.

Reconcile payouts to your bank/payment account deposits.

Record fees, refunds, and chargebacks.

Upload or file receipts for expenses incurred that month.

Set aside tax money immediately after payouts.

Review which offers are performing and whether the activity remains profitable.

Yearly routine:

Summarize total gross income, fees, and net income.

Summarize deductible expenses by category.

Check whether turnover triggers registration thresholds (like VAT/sales tax or business registration).

Ensure your records match bank statements and platform totals.

Prepare documents needed for your tax filing and keep backups.

A steady routine reduces the risk of mistakes, saves time, and makes it easier to grow your commission income confidently.

Working with an accountant: when it’s worth it

Some people assume accountants are only for large businesses. In reality, commission and referral income can get complicated quickly because it involves platforms, cross-border payments, and variable timing. If any of the following apply, professional help can be worth the cost:

You earn across multiple countries or currencies.

You have withholding tax deducted abroad.

You’re unsure about VAT/sales tax responsibilities.

You want to form a company or move income into an entity structure.

Your income is growing and you want to optimize deductions legally.

You have messy past records and want to correct them cleanly.

If you do work with an accountant, bring organized records. The better your documentation, the less time (and cost) is spent on basic cleanup.

Practical example: a simple way to “deal with it” end-to-end

Imagine you earn referral fees from three sources: a software affiliate program, a local service provider who pays a finder’s fee, and a marketplace that pays you in gift cards for referrals. Here’s a clean workflow:

1) Create one master spreadsheet. Add a row each time you receive a payout or a non-cash benefit. Record date, payer, description, gross, fees, net, and the value of non-cash items.

2) Save evidence immediately. Download the payout confirmation or take a screenshot of the dashboard showing the payout amount and date. Store it in a folder named by year and month.

3) Track expenses alongside income. Keep receipts for hosting, ads, tools, and any other business costs. Add them to an expense tab with date, vendor, category, and amount.

4) Set aside tax. Transfer a set percentage of cash payouts into a separate savings account. For non-cash benefits, set aside cash from other income if needed, or at least note that there may be a tax cost.

5) Reconcile monthly. Once a month, compare your spreadsheet income totals to what hit your bank/PayPal accounts and what the platforms say they paid. Investigate differences.

6) Prepare for filing. At year-end, total your income and expenses, and use the summaries for your tax return or provide them to your accountant.

This workflow is not glamorous, but it is reliable. It scales from £50 a month to £5,000 a month without breaking.

Final thoughts: keep it simple, keep it consistent

Dealing with income earned from commissions or referral fees comes down to three habits: classify it correctly, track it consistently, and plan for tax and compliance early. The details differ depending on whether you’re an employee earning commissions, an independent affiliate marketer, or a business receiving referral fees through contracts. But the principles remain the same: treat the earnings as real income, keep strong records, and build a routine so you’re never scrambling.

If you’re at the beginning, start with a spreadsheet and a separate account. If you’re already earning meaningful amounts, consider upgrading to bookkeeping software, formalizing your business setup, and getting professional advice—especially if international payments, VAT/sales tax, or withholding taxes enter the picture. When you handle commission income with structure, it stops being confusing and becomes just another predictable stream of revenue you can manage with confidence.