There is an old adage that says, "A little knowledge is a dangerous thing." On the one hand, it is logical that someone can make serious mistakes acting on a partial understanding of the facts. Yet some people do very well with just a little knowledge because that is all they need.
Something as simple as knowing where a need is and knowing likewise where a supply can be found can be of enormous value. In fact, this ability can yield a substantial income – if utilized intelligently. Moreover, there are many who make a living collecting finder's fees. This sort of work has tax implications.
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What Is a Finder's Fee?
Also known as a referral fee, a finder's fee is a share of the proceeds from a financial transaction that is given to an agent or broker who brought the parties together. Without this intermediary, it is accepted, the deal would never have happened. Thus, the finder brings value and, thus, earns income. That revenue may be according to contractual obligation or be simply conferred as a gratuity for services rendered.
Perhaps a farmer wants to retire but has no children to which to deed the land. A friend might do some research and find a willing buyer. For the effort, he may receive a finder's fee.
Common Referral Fee Transactions
A real estate investor can employ a "scout" to locate distressed properties. Those that meet the investor's criteria for rehabilitation and wholesaling, and lead to an actual purchase and sale, are credited to the scout, who gets a cut of the proceeds. In the same way, a real estate agent can find buyers through an associate who may or may not be licensed.
That individual can qualify for up to a quarter of the commission paid either from seller's proceeds or directly from the agent's broker. Referral fees are perhaps most common in real estate but are not exclusive to property conveyances. Headhunters can earn finder's fees by finding acceptable recruits for companies, as another example.
Consider Also: How to Get A Referral Fee From Real Estate Investors
Can I Make a Living on Finder's Fees?
Those with a gift for networking can do well as full-time facilitators/intermediaries. To be successful in this age also requires a knack for technology and a strong social media presence. Prospective business owners do well to subscribe to the websites relative to their industry, e.g. real estate or executive recruitment. Meanwhile, investing in strategic advertising and developing a standard form of contract are also necessities for the full-timer.
Consider Also: What Is a Real Estate Referral Company?
How Does an Intermediary Report Income?
As a staff recruiter, the intermediary is paid by the hiring company. As a real estate conveyance facilitator, this person is either paid by the selling brokerage or receives a percentage of the proceeds disbursed at settlement. In the former case, the paying party will issue an IRS 1099-MISC or 1099-NEC form if the compensation for services rendered is $600 or more.
Finder fee jobs may take in more or less than that amount. If less, it is imperative that the finder maintain some record of the transaction, which should be standard practice in any event.
Is a referral fee taxable? Absolutely. It is as much taxable revenue as salaries, wages and tips.
For those with a finder's fee business, multiple 1099s will come their way each January. However, when a finder's fee is paid informally, as a thank-you gift, for example, the giver is not obliged to issue a 1099 real estate commission statement.
Consider Also: What Is a 1099 Tax Form?