I have a service in which I simply am the middleman for my client so that they don't have to deal with certain technical aspects.

So payment goes as such:

I get paid for the service > I pay the person who delivers the service > I deliver completed service to client.

I don't profit much on this as it's just a simple service charge to alleviate some stress and time from already busy business owners. I'm worried that I might lose money due to taxes or that in the future - if I don't file things correctly I could face issues with the IRS.

I charge the client $600 and pay the worker $500. I make $100.

If I'm taxed based on the $600 then I lose money. I assume I only pay taxes on the $100 net profit.

(While I've been a freelancer for half a decade - I've never done anything except straight client work so I'm new to this)

If I pay taxes on the $100 like I think I do, no big deal.

However, my invoices to show my income will show that the client paid me $600.

Is it as simple as:

When I pay the worker $500 I attach their invoice to my invoice to show that I made $600 but paid $500?

Afterwhich I put X% of the $100 into my tax account.

  • 1
    Taxes generally involve 2 columns - income and expenses. $600 income, $500 expense.
    – Scott
    Aug 6, 2016 at 17:05
  • taxes are usually charged on profit, not turnover.
    – user152
    Aug 6, 2016 at 18:21

2 Answers 2


Just to be sure, let's not confuse VAT or Sales Tax (based on revenue) and other taxes based on the profit your company makes.

VAT is calculated on what you invoice: you invoice 600,- and you will charge VAT on your invoice based on the 600,- (payable VAT to tax authorities). However you also paid 500,- for the service which means you will also have paid VAT on that invoice (receivable VAT). So at the end of the month or quarter you need to pay VAT but not for the full 600 but only for the difference between VAT you paid (which was invoiced to you) and the VAT you charged (which you invoiced your customer).

Other taxes are usually based on profit. You earned 600, but to make that 600 possible you also paid 500. So your profit before taxes is 100 and you will pay taxes on it, finally resulting in your profit after taxes.


Tax is always on profit. You have not left yourself much room though for when the worker you are paying lets you down, or jobs go awry, etc. Things go wrong in business and you could well be storing up a big fall. If you had to then pay someone else to do the same job you would be looking at a huge loss.

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