This is ReferralHero. Building a network of customers who actively refer new business is the dream—but what's in it for them?
Referral fees! These monetary rewards incentivize customers, partners, and advocates to bring you qualified leads. But getting referral fees right requires understanding the legal requirements, tax implications, and industry benchmarks.
Here's everything you need to know about paying referral fees in 2025, including how much to pay, legal compliance, and proven strategies that work.
What is a Referral Fee?
At its most basic, a referral fee is a payment made to someone who brings business to your company.
It can be paid in cash, or as a sales credit or gift card. Whatever works best for your business.
The concept of referral fees has been around for a long time, but setting one up yourself can be tricky.
For example, if you offer too much money in your referral fee program, you might end up paying out more than what the customer is worth.
On the other hand, not offering enough money might discourage people from referring their friends and colleagues.
So it’s important to find a balance between what’s fair for both you and your referrers.
Why Pay a Referral Fee?
A referral fee can have huge benefits to your business.
It encourages customers to refer your business to their networks, tapping into new audiences and driving growth.
You’ll also help boost your customers' loyalty by showing how you value their support. Everyone likes to have their contributions noticed.
While a referral fee may seem like it’s cutting into your profits on a sale, it can actually be more cost-effective than traditional marketing.
When you calculate the ROI of referral programs, it ends up taking a lot less of your marketing budget with a lot more of a return.
The quality of leads is often better when coming from a referral as well. Someone coming in because of a friend will have way more trust in your brand than an organic lead.
It also gives you an in for people who are challenging to engage.
If your ideal customer is someone who is less likely to try new things on a whim, offering a reward to people who reach out to them for you is a great place to start!
Referral Fee Statistics & Benchmarks
Understanding industry standards helps you set competitive referral fees. Here's what businesses are paying in 2025 (although they can be dependent on a slew of different factors):
Average referral fees by industry:
- Technology: $5,000 per successful referral
- Healthcare & Finance: $2,500 per referral
- Construction: $3,000 per referral
- Real Estate: 25% of gross commission (typically $3,000-$10,000)
- Manufacturing: $1,000 per referral
- Retail: $500 per referral
- E-commerce: 10-20% of first purchase value
Key performance metrics:
- Referred customers have a 37% higher retention rate than other customers
- Referred customers are 4x more likely to refer others (compounding effect)
- 84% of companies now have active referral programs
- Referral programs show 25% more profit per customer compared to non-referred customers
These numbers show that while referral fees require upfront investment, the long-term value of referred customers justifies the cost.
Quick Tip: Start with a conservative referral fee (10% of sale value) and increase it based on performance data. Track which fee amounts generate the most high-quality referrals, then optimize from there.
Challenges of Offering a Referral Fee
The biggest challenge of offering a referral fee is finding the right balance. You need to make sure that you’re not paying out too much money, or not enough.
It can be difficult to get this balance right as there are so many factors involved, such as the size of your business and the type of customers who use it.
Another challenge is tracking all of your advocates and making sure they receive their payment at the right time.
This requires an effective system for tracking referrals and payments, which can be time-consuming and challenging to set up.
Using software designed specifically for managing referral programs is the best way to tackle this issue head-on.
ReferralHero can help you plan out your strategy for referral fees, keep track of what’s happened, and see if there are any areas that can be improved upon.
Does a Company Have to Pay A Referral Fee?
If someone’s referred a friend to your business, do you automatically owe them a fee?
No, not at all! While referral fees and finders fees are powerful tools, whether or not to offer one is ultimately up to you and your business.
Giving them money isn’t the only way to say thanks. You can also offer a discount, gift, or experience for those who help your business grow.
Again, getting some kind of reward will likely make the person more invested in bringing in more business for you in the future, but there is no obligation on your part to show your appreciation in this way.
Referral fee vs Commission vs Kickback
Referral fees are different from commissions and kickbacks, although they may look the same on the surface.
A commission is a payment that’s earned for successfully making a sale or closing a deal. It’s usually continual, as opposed to a one-time payout.
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 advertisement or favoritism. Referral fees, on the other hand, are given for honest recommendations.
Kickbacks should not be confused with referral fees, as they are illegal in many countries and, ultimately, a dangerous process to fall into.
Referral Fee Strategies
Having a plan in place is the first step in your journey with referral fees.
There are a few popular structures you can consider.
Strategy One: Flat Fees
This is the most popular structure for referral fees.
Offer a specific amount for every referral brought in, such as $50.
This can be paid out once the new customer makes a purchase, and is a great way to instate a referral program without putting in too much money upfront.
Strategy Two: Percentages
Just like the flat fee structure, this is a way to minimize your upfront costs.
Give a percentage of the first sale to the referrer, like 10%.
This has the added bonus of encouraging higher-value referrals.
Strategy Three: Blitz
Putting a time limit on your referral program uses the power of FOMO to get more buzz.
It’s a great way to spur immediate action and get customers coming in quickly.
Strategy Four: Tiered Bonuses
Another way to encourage higher-profile referrals is to have a tiered structure, offering more money for return customers.
To separate this from a commission, it helps to have specific benchmarks a referral has to meet to qualify.
This is where tracking comes in extra handy.
Using a mixture of these strategies allows you to customize your structure to your business’s individual needs.
Real-World Referral Fee Examples by Industry
SaaS Companies
Monthly subscription services typically offer 10-20% of the first year's contract value. For a $10,000 annual contract, that's a $1,000-$2,000 referral fee.
Service Businesses
Common structure: $25-$50 credit per successful referral, or one free service (haircut, training session, cleaning). Some offer tiered bonuses: refer 3 people = $100 bonus, refer 5 people = $200 bonus.
B2B Professional Services
Accounting firms, law firms, and consultancies often pay 10-15% of first-year billings. For a $50,000 contract, that's $5,000-$7,500 to the referring party.
Real Estate
The standard is 25% of the referring agent's commission. On a $400,000 home with 3% commission ($12,000 total), the referring agent receives $3,000.
E-commerce
Most online stores offer 10-15% of the purchase value. Some use tiered structures: refer someone who spends $100 = $10, spend $500 = $75.
How Much Should Your Referral Fee Be?
The amount of the referral fee can vary depending on your industry, and how much you’re willing to spend.
You need to consider how much business someone is bringing in from a single successful referral.
For example, if you’re running an accounting firm, you may want to pay a hefty bonus for each new client that signs up for services due to the referral.
On the other hand, if your company sells widgets online, you may be happy with paying out smaller bonuses since each sale could represent only a few dollars in revenue.
Keeping track of each referral allows you to adjust these numbers as you go.
Right off the bat, though, take a look at how much you’re already spending on each sale.
Consider:
- The commission for the salespeople
- Steps in the purchasing process
- Cost of making the product or delivering the service
- Current marketing budget
- Profit margin
Remember that even with a top-notch referral, many of these costs won’t change.
However, you need to make sure that the reward is enticing enough to make people want to make more referrals for you.
If your costs are too high to justify a decent referral fee, offering a small discount may be just as effective.
What's a fair referral fee percentage?
Fair referral fee percentages range from 10-25% of the sale value or commission. Real estate typically uses 25%, while e-commerce and SaaS often use 10-15%. Consider the effort required and relationship value when setting your rate.
Tax and Legal Implications Of Referral Fees
Federal Tax Requirements
Referral fees are considered taxable income by the IRS. Here's what you need to know for 2025:
For payments under $600/year:
- No 1099 form required
- Recipient must still report income on tax return
- Can structure as customer "rebate" or "credit" to avoid 1099
For payments $600 or more/year:
- Must issue Form 1099-NEC to the recipient
- File by January 31, 2025
- Withhold taxes if recipient doesn't provide W-9
- Keep records for at least 3 years
Customer Rebate Exception:
If the person receiving the referral fee is a previous customer, you can classify the payment as a rebate, discount, or refund—making it non-taxable.
Requirements:
- Payment must not exceed what they previously paid you
- Must be for goods/services they actually purchased
- Document it as a "customer appreciation credit"
State-Specific Regulations
Certain industries have strict referral fee laws:
Real Estate: Must be licensed agent to receive referral fees (federal law)
Financial Services: Requires proper licensing, SEC regulations apply
Healthcare: Anti-kickback statutes apply (federal and state)
Legal Services: State bar association rules govern referral fees
Automotive: Many states prohibit unlicensed individuals from receiving fees
Compliance Checklist:
- Research your state and industry regulations
- Create written referral agreements
- Track all payments with proper documentation
- Consult a tax professional for your specific situation
- Disclose referral relationships to customers when required
Always consult with a tax professional or attorney before implementing a referral fee program, as penalties for non-compliance can be severe.
Frequently Asked Questions About Referral Fees
Are referral fees legal?
Yes, referral fees are legal in most industries and states. However, certain regulated industries (real estate, financial services, healthcare) have specific licensing requirements. Always check your state and industry regulations.
How much should I pay in referral fees?
Industry standards range from $500 (retail) to $5,000 (technology). A common formula is 10-25% of the first sale or contract value. Test different amounts and track which generates the most referrals.
Do I need to report referral fees to the IRS?
Yes. If you pay $600 or more to an individual in a calendar year, you must issue a 1099-NEC form by January 31. Payments under $600 should still be tracked internally.
Can I pay referral fees to customers?
Yes. You can structure these as customer rebates or credits if they don't exceed what the customer previously paid you, potentially avoiding 1099 requirements.
When should I pay the referral fee?
Most businesses pay after the referred customer completes their first purchase or after a specific milestone (signs contract, completes onboarding, stays 30 days). This ensures the referral results in actual revenue.
The Bottom Line
Referral fees are a great way to reward individuals for their support!
Not only do they encourage positive customer experiences, but can also lead to increased customer loyalty and higher profits.
With the right incentives in place, tools to help you keep track of everything, and an understanding of what's allowed, paying referral fees could be an effective way to build relationships with customers and benefit your business in the long run!
.png)
