Are referral or finder's fee income subject to SE Tax?

[AnmarieA]

I have a taxpayer who received a 1099-NEC and when asking the client what this income relates to he explained that as part of his W-2 Job he sells equipment. When his customer needs financing he refers them to a financing company who works directly with the customer and the financer knows the product and manufacturer and handles financing that the taxpayer's company does not offer. Every time a financing contract is executed (applied and financing approved) my taxpayer receives a referral fee. The financing company issues a 1099-NEC vs 1099-MISC. The annual referral fee is reported in box 1 of the 1099-NEC in accordance with the 1099-NEC instructions.

My question is - Is all income in Box 1 of the 1099-NEC subject to SE Tax? and are expenses allowable to deduct against this income when they are not directly related to the generation of this income.

My taxpayer does not have a business so should not need to file a Sch C as in prior years his tax professional included this activity on Sch C and deducted expenses like his cell phone and internet expense and then paid SE Tax on the net income. Since my taxpayer really does not have a business I do not believe it warrants a Sch C and the expenses that had been deducted on the Sch C are unrelated to the income generated. He is a W-2 wage earner and not in business for himself. The financing company who pays him the fees is an unrelated party. This is customary in his industry but was uncertain if I can enter in ProConnect as Misc Income NOT subject to SE Tax?

Feedback greatly appreciated. 

[sjrcpa]

If it is customary in his line of work and he gets these fees frequently, it sounds like a business activity.

EDIT: I'll concede if it is spiff then no SE tax. I wasn't thinking along that line. I've only ever had one client who got them.

[qbteachmt]

This person is getting a commission on sales, but it's a service, not a product. Yes, that is 1099-NEC, because they could be going to any lender, just like a broker. So, yes, he is in this as a side business, because he is doing this for money and it isn't related to the employer.

You can probably answer this part yourself: "when they are not directly related to the generation of this income."

[BobKamman]

This sounds a lot like "spiffs" that are paid to employees of car dealerships (or at least they used to be, I don't have any clients in that line of work anymore).  

You can do an online search and find different answers.  Here's one from NATP that says, for the facts given, it's not subject to SE tax.  

https://blog.natptax.com/article?articleId=6SoZF5qEZaPVJ5fWKKKRM8

Reminds me of the Big Pharma sales reps who delivered free pizzas to the nurses in clinics that used their products.  (FDA rules have since banned much of this.)  And of course tonight we have the Oscars, and the question of whether the "goodie bags" are taxable.  But SE income?  I vote no.  

[rbynaker]

We don't have all of the details but it sniffs like spiffs to me.

[BobKamman]

What I remember from the spiffs that my car-dealer clients received was that they were not directly tied to sales.  It was more a reward for not pointing customers to other suppliers.  The per-transaction payment bothers me here, but the underlying fact is the same:  a person can't have two masters, and if you have an employer, you can't harm the relationship with his customers by pointing them in the wrong direction.  If the supplier who appreciates the referrals (that help your employer make sales) wants to give monetary thanks, who are you to turn it down?  But you were just doing your job.  

[Ayeshaarian]

You're absolutely right! The distinction between services and products can definitely get tricky when it comes to 1099-NEC, especially in cases like this where a person acts as a broker or intermediary. The key factor really seems to be the nature of the income and whether it's tied directly to the employer or is more of an independent side business. Thanks for breaking it down so clearly!