We are going to pay our members for referring others and pay the referee as well. Where should we report those fees on the 1099 form for both the referrers and referees?

[SweetieJean]

AZFCU = Arizona Federal Credit Union

[Opus 17]

If true, then presumably the AZFCU will confirm my answer with a responsible authority.  Just because I have a computer doesn't mean I know what I'm talking about. 🙂

[Opus 17]

If "you" are a business, you generally report cash payments to vendors, contractors etc. if the cash payments are more than $600 in a year.  You don't need to report payments made to other corporations, just individuals, and you don't need to report "referral bonuses" that are merchandise or other discounts, only direct cash (money, check, etc) payments.

Your payments are either going to be in box 3 ("other income") or box 7 ("non-employee compensation").  The key I think is "compensation", which means "You made the payment for services in the course of your trade or business." I think you need to understand "services" in the context of working, and of the term "earned income" which relates to the fact that box 7 income is subject to social security tax for "working" and box 3 is not.

Since I don't know what you mean by members, referrals, or referees, I can't really say more.  It's going to depend entirely on what is being done to get the money.  

Let's say you are a Country Club with annual dues of $5000, and you give a referral bonus of $1000 payable to both the referring member and the new member's first year.  The new member would be getting a discount, not a payment, so that's not reportable at all.  The referring member could be treated as getting a $1000 payment in box 3, but you could also apply it to their account and then it is a non-reportable discount, not taxable income.

If you have a pyramid-type direct marketing company where members earn discounts on merchandise but also get cash payments for signing up new (downline) sales people, that's going to go in box 7 because it's similar to other types of commissioned sales.  (Whereas, if by signing up new downline members they simply earned a bigger discount off retail prices, that would be non-reportable.)

It's so specific that I can't say more without knowing a lot more about your business.

One more rule is that if you have a contract worker, like a commissioned salesperson, whose commissions are properly reported in box 7, then these membership "referral" payments would also go in box 7 in most cases, even if they would be box 3 payments for someone who is not a contract worker.

[azfcu1]

Thank you for your quick response! I work for a Financial Institution and my company is offering these fees for opening an account referrals. Please let me know which box is most suitable for both the referrers and the referees.

[Opus 17]

So, the new account holder would probably get a 1099-INT for interest income if this was money deposited into their account. Or, it could be a 1099-MISC in box 3, especially if this was a large non-money gift. (Open a new IRA and get a tablet computer, for example.)

The bonus to the referring member could either be interest on a 1099-INT, or other income on box 3 of 1099-MISC.

I actually just read an article about something similar last week related to credit cards that give rewards points, dollars or miles.  The rewards that a cardholder earns from their normal purchases are not taxable because it is basically a rebate of the transaction fee (there is a 3 way deal between the cardholder, the card issuer, and the merchant, where the issuers charges a fee to the merchant, the merchant includes that in their markup, which the cardholder pays.  The rewards are a rebate of that fee and is not taxable income.)  BUT, a joining bonus (50,000 miles if you make X purchases in Y months, etc) is considered taxable income and customers are getting surprise 1099-MISC forms that they weren't expecting.

[Opus 17]

So noting @SweetieJean 's comment above, and the possibility that you are a credit union, I would add the following reminder.

If you decide this is "other income", then you are only required to issue a 1099-MISC if the value of the reward is more than $600 to any customer in any year.  You CAN issue a 1099-MISC  if the reward value is less than $600 but you don't have to.  If you decide to treat the reward (referrer or referee or both) as account interest, then you would have include it in their annual 1099-INT no matter what the amount is.  (I think the threshold for a 1099-INT is $5.)

[azfcu1]

What about the referrers reporting? Should we report these fees in box 3 or 7?

[Opus 17]

In the simple case***, both the new customer (referee) and the existing member (referrer) would either get a 1099-INT or a 1099-MISC in box 3, depending on the form of the payment.

***However, there is always room for complications if the referrer is or might be an employee or contract worker.  I don't think this is what you are talking about, but I do want to emphasize that the treatment of the payment depends on your (business) relationship with the referrer.

For example, if the referrer is a regular hourly or salaried employee who collects a few bonuses because they invite friends and family, their payments are added to their paycheck as income, is subject to federal, state, social security and medicare withholding, and is included on their W-2 at the end of the year.  (Even if the referrer is also a member, and even though the payments would not be job income if the referrer was only a member, they are considered wages if the referrer is a pre-existing employee.  Sucks for them.)

I can also imagine an arrangement where you encourage or authorize a person to sit at a table at the shopping mall, county fair, on a busy street at rush hour, etc., to recruit and sign up new customers on your behalf.  That person would be a commissioned sales person and would get a 1099-MISC with the income in box 7.

[azfcu1]

Thank you so much!!