How to structure referral fee?

[Justin Tischer]

My plumber called me the other day and told me he had a roof sold? Dont ask, I dont know why he would be selling this type of work. Anyway he asked for a price and I told him $8,500. He accepted and told me he sold it for $10,000. Heres the problem. He wants me to accept the full $10,000 and then give him the $1,500. But we both realized thats not practical because I would be paying taxes on his portion. He doesnt want to accept the payment because he is not insured to do roofing.

Is their an obvious solution to this? Can I accept the money and it pass through my S-Corp without negative affects. Am i overlooking something that might even be more important?

I wouldnt do this for just anybody this guy brings big money through my door so if I can help him on this i will.

Justin Tischer
Vertigo Construction

[Dancing Dan]

Re: How to structure referral fee?

Would the $1500 be off the books? Otherwise, if it's on the books, it's a wash - either $8500 or $10,000 - $1500, except for the extra $1500 you'll be paying liability on for roofing.

[David Meiland]

Re: How to structure referral fee?

I don't see why you couldn't pay someone for professional services, and if those services happened to include sales or lead generation, then so be it. People pay for all sorts of professional and consulting services: legal, accounting, market positioning & business strategy, organizational structure, compensation, sales and marketing, coaching, you name it. Pay the man for his 'sales and marketing' consulting, there's no crime there.

On a one-time basis he would definitely not be an employee, so a $1500 check and a 1099 would probably do it. He would not be a sub if he is not working on the job or providing materials, so an insurance cert is not an issue. He will have $1500 in misc. income to report on his tax returns, you will have a $1500 expense. Charge it to the job or to overhead.

At least that's how I see it.

[Wes]

Re: How to structure referral fee?

Pay him as a consultant but not the full $1500. Since he wants to make it all go through you, you need to figure out what that $1500 is going to cost you in misc. expenses, such as Comp. and $10 to print the 1099. Then send a 1099 for the rest, say comp on that would cost $375 then you send him a 1099 for $1125(I wouldn't take off the $10 to have the 1099 done). There is nothing wrong with paying for a referal, just make sure that everytime you pay an individual person that you send a 1099, now if you are sending the check to a business that has its own tax id number than you don't need to send a 1099, they should have their own accounting system to cover their end.

[David Meiland]

Re: How to structure referral fee?

Why would it be necessary to pay comp? The consultant is not an employee and is not drawing wages. If you do comp then you'd better do withholding too, and don't send a 1099, send a W-2

[Wes]

Re: How to structure referral fee?

David,
Some comp rates are based on income from certain operations, say roofing. If you have to report an extra $1500 in roofing income then it makes sense to take off your comp rates. If however your rates are based on payroll (mine and many others), then pay him as a consultant and 1099 him if he is an individual.

You should look at your liability policy too, it may be based on income from certain operations. It may only be a small percentage of that $1500 but even if it is $50 it is a lot. After all how many people get 15% commission for refferals? You are going to have expenses doing this so come up with a figure that is fair for both of you and charge it. It is poor business practice to give away money. Avoid doing anything "under the table", this will get you in deep trouble eventually. Unless you are one of the few that slide by forever only to advocate it later saying "it was the only way I could make ends meet". If doing things under the table is the only way you can make ends meet then get some help because you are on a downward spiral to failure.

[David Meiland]

Re: How to structure referral fee?

Got it. I've never heard of comp rates based on retail volume, but my GL is based on volume so yes the $1500 would cost me about $25 in added premiums. There ya' go... pay the plumber $1475 for the referral.

[Kgphoto]

Re: How to structure referral fee?

Depends where you live and operate. That practice is illegal inCalifornia.

Kirk