Are referral fees deductible? (2024)

FAQs

Are referral fees deductible? ›

If you are an employee (you get a W-2) you cannot deduct any business expenses. If you are self-employed you can deduct the entire referral fee as a business expense on Schedule C.

Referral fees entail the finances given to an individual who links up the business with potential customers, which widens the customer base for the company. Therefore, the finances serve as a motivator to keep referring more clients to the industry, enabling the business to realize more earnings within a given period.

Many referral fees are calculated as a percentage of a purchase a referred customer makes. Or, you can also offer a flat fee, which works well if your margins are thin, or if you also employ a sales team or person (in addition to the referrer).

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deductibility of financial advisor fees for tax years 2018 through 2025. The IRS allows you to deduct up to $3,000 (or $1,500 if married filing separately) in capital losses from your ordinary income each year.

In accounting, customer referral fees are not typically included in the cost of goods sold. They are usually classified as a marketing or sales expense, appearing in the income statement as an operating expense, thereby reducing operating income.

Common itemized deductions include medical and dental expenses, state and local taxes, mortgage interest, charitable contributions, unreimbursed job expenses, and certain miscellaneous deductions like investment expenses or casualty losses. Filers who take the standard deduction can file Form 1040.

It is sometimes called a finder's fee and is used in many industries, like insurance, real estate, and retail. The fees, typically in cash, could be anywhere from 5% to 25% of the total sale, depending on the type of transaction.

A referral fee is just for the referral, which is why I'd put a cap on it. A sales commission is what you pay your salesperson to work with the client to put together the job and close the sale.

REFERRAL FEE ISSUANCE: Referral fees are paid by company check. A W-9 form may be requested by the Company before releasing the referral fee. Referral fees are considered taxable income, and are subject to local, state, and federal taxes.

Referral fee vs Commission vs Kickback

A kickback is also similar to referral fees; however, it tends to have more of a negative connotation. It may involve offering incentives in return for false advertisem*nt or favoritism. Referral fees, on the other hand, are given for honest recommendations.

What is a good referral percentage? ›

The effectiveness of your referral program can vary widely based on industry, product, target audience, and various other factors. However, a good referral rate often falls between 2% to 5% of the total customer base. This means that 2% to 5% of your customers actively refer others to your business.

A consulting referral fee of 5-15% is common. On a large deal with a low level of involvement, you're looking at a finders fee of 1-5%. On a smaller deal with a high level of involvement, the finder's fee can go from 5% all the way up to 35%.

You can deduct fees you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your consulting business.

Legal and other professional fees are not specifically mentioned in the Code as deductible items. Therefore, a taxpayer is able to deduct these types of fees only if they qualify as “ordinary and necessary” expenses under §162 (business expenses) or §212 (expenses related to the production of income).

According to the IRS, "unless you're self-employed, tax preparation fees are no longer deductible in tax years 2018 through 2025 due to the Tax Cuts and Jobs Act (TCJA) that Congress signed into law on December 22, 2017. Self-employed taxpayers can still write off their tax prep fees as a business expense."

But it depends on how much referrers earn and whether or not they're employees. According to the Employer's Tax Guide from the Internal Revenue Service (IRS), referral bonuses to employees are considered supplemental wages: “Supplemental wages are wage payments to an employee that aren't regular wages.

A referral fee is just for the referral, which is why I'd put a cap on it. A sales commission is what you pay your salesperson to work with the client to put together the job and close the sale.

How are referral credits taxed? Whether you redeem your referral credits for cash award(s) or prize item(s), both are subject to taxes.

Referral fee vs Commission vs Kickback

A kickback is also similar to referral fees; however, it tends to have more of a negative connotation. It may involve offering incentives in return for false advertisem*nt or favoritism. Referral fees, on the other hand, are given for honest recommendations.