Accounting for Referral Fees
Advice on how to figure "thank you" payments for referrals, and how to enter them into your bookkeeping system. March 25, 2008
I own a hardwood flooring company. Recently, we have been getting a lot of business from renovation contractors. I would like to say "thank you" by sending them a referral fee of 10% of the final invoice amount. Some of them expect that, however those expectations are rarely indicated in the initial conversation. How would I handle such “business expense” from the accounting and bookkeeping perspective? Do I calculate the 10% of the total net price of the job, or do I use the gross amount? Will I subtract the 10% from the final invoice amount and use it as a business expense and write it off when submitting my input tax credits? When handing someone a check for the 10%, do I also give them a statement specifying the referral job information, and do I add the tax to the referral amount that I pay them, and expect them to file it as income? How is this done in real life situations?
(Business and Management Forum)
From contributor B:
I group this expense in with the advertising. I don't know what the standard is for flooring, but 10% of gross seems very high. I will typically give 3% of gross to a designer that refers me a good job (cabinetry, not flooring). I came up with this number because that is what it would cost me to advertise and get the same amount of work. From a tax perspective, I would think it would be best to ask your accountant.
From contributor J:
Whatever you do, don't write a check to an individual unless you are prepared to file 1099s if the amount is enough. Not sure what you mean by "...do I add the tax...?" Sales tax? No, you didn't purchase anything from them. I wouldn't debit the advertising expense account because it's not advertising and it would be confused with your real advertising expense.
From contributor E:
I show this expense as outside sales. I pay their company, not the individual. If it is the person - I do the 1099.
Form the original questioner:
Thank you. It helps a lot to know what others are doing in similar situations. We are in Ontario, Canada, so I have no idea what a 1099 is ;) I will definitely talk to my accountant. I don't want any issues with CCRA (our version of your IRS).
From contributor S:
Whatever commission you pay for the referral, make it a percentage of the total sale, not the net. You do not want to divulge your profit margins. Doing so will leave you open to a lot of penny pinching in the future. Do not pay a percentage of the sales tax. For accounting purposes, it goes in the same column as "bribes, kick backs, commissions or salesman expense."
Would you like to add information to this article?
Interested in writing or submitting an article?
Have a question about this article?
Have you reviewed the related Knowledge Base areas below?
KnowledgeBase: Knowledge Base
KnowledgeBase: Business: Estimating/Accounting/Profitability
KnowledgeBase: Business: Marketing
All rights reserved. No part of this publication may be reproduced in
any manner without permission of the Editor.
Review WOODWEB's Copyright Policy.
The editors, writers, and staff at WOODWEB try to promote safe practices.
What is safe for one woodworker under certain conditions may not be safe
for others in different circumstances. Readers should undertake the use
of materials and methods discussed at WOODWEB after considerate evaluation,
and at their own risk.
335 Bedell Road
Montrose, PA 18801
Copyright © 1996-2016 - WOODWEB ® Inc.