A finder's fee is a fee paid to someone who helps to facilitate a transaction. Someone who collects a finder's fee essentially is being paid a commission for helping to connect one party with another.
Finder's fees can be paid in a variety of scenarios and the details of the situation can determine who pays the fee and how much is offered. While you may not run into opportunities to earn a finder's fee very often, it's still helpful to understand how they work.
Definition and Examples of Finder's Fee
A finder's fee is money paid to someone for helping facilitate a transaction. This is a general definition; specific definitions of finder's fee can vary by industry.
For example, a real estate finder's fee may be defined as "any compensation or commission directly or indirectly imposed by a broker and paid by or on behalf of the borrower for the broker’s services in procuring, arranging, or otherwise assisting a borrower in obtaining a loan or advance of money," according to the State of Maryland’s commissioner of financial regulation. In business settings, a finder's fee may be called a referral fee.
Broadly speaking, finder's fees act as financial incentives for the entity or individual who receives them. A finder's fee is compensation that can be earned simply by making referrals or recommendations.
- Alternate name: Referral fee, referral bonus
Finder's fees can take different forms. Some common examples of finder's fees include:
- Bonuses paid for referring new employees to your workplace
- Rental credits paid to tenants who refer new renters to their current landlord
- Shares of stock given to individuals or entities that help facilitate mergers
- Money or free gifts you receive for referring someone to a business
Businesses can offer finder's fees to everyday consumers in the form of affiliate programs.
How a Finder's Fee Works
Finder's fees can serve an important purpose for businesses or other entities that pay them. Offering a finder's fee can help to increase sales or revenues if it encourages more referrals.
Say that your favorite cosmetics brand offers a $25 cash bonus for each friend or family member you refer. To get the bonus, your friend has to sign up and make a $50 purchase. If you refer 10 friends who each make a $50 purchase, the cosmetics brand generates $500 in sales and pays you $250 in referral bonuses.
Finder's fees can also be beneficial to the entities that earn them. In fact, some companies base their entire business model on earning referral fees. Loan marketplaces are great examples.
These marketplaces act as a go-between for lenders and consumers who need or want to apply for loans. The marketplace lists loan options from partner lenders. Consumers visit the marketplace and apply for a loan with one of the listed lenders. If the loan is approved, the lender pays the marketplace a finder's fee for referring the borrower.
Finder's fees pop up in other settings as well. For example, say your friend wants to sell their home. They ask you to talk up the property to friends and family in the hopes one of them will be interested in buying. You tell one of your coworkers about the home and they end up buying it. Once the sale goes through, your friend could pay you a finder's fee for helping them to connect with the buyer.
The amount paid as a finder's fee can vary from one transaction to another. For instance, a company may offer a finder’s fee that is a percentage of the purchase made through your referral, or it may be a flat fee offer for every purchase made through an affiliate link. In the case of stock apps, you might earn a share of stock for every new user you refer.
States can set restrictions and limits on when finder's fees can be paid in real estate transactions.
Special Considerations for Finder's Fees
Collecting finder's fees could be lucrative. But this isn't always free money; individuals and businesses that receive finder's fees may have to report them as taxable income to the IRS.
Finder's fees, referral fees, and referral bonuses can all be reported on Form 1099-MISC or 1099-NEC. If you're reporting a finder's fee on your taxes, you'll need to specify who paid the fee and the amount paid.
Failing to report finder's fees or other taxable income you received could trigger penalties and interest if your return is audited by the IRS.
- A finder's fee is a fee paid to one person or entity for facilitating a transaction between two other people or entities.
- Finder's fees can also be called referral fees or referral bonuses.
- Businesses can use finder's fees to expand their customer base and increase sales while rewarding existing customers for their loyalty.
- State law may determine when a finder's fee can be paid in certain transactions, including those that involve the purchase or sale of real estate.