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.