What you need to know about

Referral Program Tax Compliance

The success of referral marketing programs has firmly established referrals as an essential part of the B2B marketing strategy. With the increase in adoptionmarketers have moved to using automated referral marketing platforms to organically grow their customer base. One factor that is critical to the success of areferral marketing program is having the referral marketing platform you select properly handle tax compliance.

The world of rewards and taxes is no different than dealing with taxes any other time. It is complex and at times confusing. The good news is that as the referral automation platform landscape has evolved, mature platforms have begun to provide the tools needed to help you manage tax compliance requirements around rewards. But that doesn’t mean you can forget about it.

In this white paper five common questions surrounding tax compliance and rewarding within referral programs will be answered.

1. When is a W-9 form required? 2. When is a W-8 form required?3. What is the difference between a W-8BEN and W-8BEN-E? 4. When do I send a 1099 to an advocate?

Whether referrals have been part of your playbook for years or you are just beginning to create a strategy around referrals, a basic understanding of tax compliance and referral rewards will go a long way towards protecting your program.

Introduction

What makes tax compliance critical to success? If your referral program has a large reward amount or advocates that refer often, you’re likely going to have your advocates reach the $600 taxation level.

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Basic tax compliance

While tax form collection can be daunting, the good news is it’s not required for each and every advocate in your program. In fact, the collection of the proper tax forms (more on those in a minute) are only required when a advocate has earned $600 or more in referral rewards. Referral rewards by definition includes any type of cash reward, gift card or other financial payment made to an advocate as part of your referral program.

The forms required for tax compliance is where things begin to gain complexity. Two factors influence what form is required for an advocate.

1. Is the reward recipient an individual or a company? In the case of many partner programs, the reward for a referral is awarded to a company.

2. Does the advocate pay U.S. taxes?

Referral program tax automation simplifies the collection of this information. To the right is a sample of how those questions look to an advocate in Ecoware’s Amplifinity referral program.

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Required tax forms

When your advocate pays U.S. taxes a W-9 form is required for completion when the advocate reaches $600.

Collecting this information is essential for filing taxes. Many referral programs will withhold rewarding beyond$600 until the information is on file to ensure compliance.

For foreign citizens in the U.S., a W-8 form is required for completion. For individuals that are foreign, a W-8BEN form is required and for foreign companies it is a W-8BEN-E.

In the case of the U.S. tax form things are simplified. This is because the W-9 form allows the person completing the form to select whether they are an individual or company from the same W-9 form, so only one form is required.

Required tax forms

To the right is Amplifinity’s W-9 collection form that allows advocates to fill out and easily submit within the referral program registration process or when they reach $600.

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One important consideration for your referral program is the proper time to collect the required tax forms. As stated, a tax form is not required to be completed until the advocate reaches $600 in referral rewards. For some referral programs that offer modest rewards, reaching $600 in rewards would be the exception rather than the rule. In this case, the marketer may decide that an automated process for collection may not be required and a manual process for the few who reach this level would suffice. For B2B referral programs it’s common to havelarger referral rewards or programs where you expect mulitplesuccessful referrals. For these programs it may be best to make tax information collection part of the advocate registration process or presenting the necessary tax form at the time of first reward.

Timing of tax form collection

An additional consideration is information consistency. It is important to understand how your referral marketing platform provider handles the syncing of advocate information. This includes the information provided by the advocate at registration and the information provided on the required tax form. For instance, if program registration and tax collection are done at different times, make sure the information (like address) matches.

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After tax form collection

You have now collected the required information from your advocates. What do you do with these W-9 and W-8 forms you have collected? Once again, it depends on the form. For all collected W-9 forms you will be required to create a 1099-MISC form for each advocate who reaches the $600 level in rewards. This requires matching the total amount earned in rewards during the calender year with the W-9 information collected.

Together, this information is used to create the 1099-MISC form and must be sent to each advocate. You can distribute the 1099-MISC to each advocate via mail or eFile.

The 1099-MISC form provides the advocate with the information needed when filing their personal income taxes. Note, a 1099 form is not required for your advocates who received less than $600 in rewards for the year.

For W-8 forms, both the W-8BEN and the W-8BEN-E, your required follow-up action is to simply have information on file in case of audit. No distribution ofform is required for either W-8 form. However, it is recommended to keep them on file. If collected through your referral marketing platform, make sure your platform provider has them on file.

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Additional considerations

So far, all of the rewards discussed have made the assumption that a brand is making payments from a U.S. bank. If you are a large, global organization and you are contemplating making reward payments from a foreign bank it is recommended that you consult your accountant. This way you can get a clear understanding of how any FATCA (Foreign Account Tax Compliance Act) reporting specifics may impact your designed reward workflow.

The assumption has also been made that referral rewards are the only rewards you are distributing. What happens if you have two types of marketing programs that are providing rewards? For example, a customer receives a $400 reward from your referral program and a $300 reward from another marketing initiative. In this scenario, the same forms are still required, the same next steps still apply, but you are now operating outside of the automated process of your referral marketing platform. If this scenario is a possibility based on your active marketing programs, make sure you have a plan and process in place to manually combine the reward amounts. You may still use your referral marketing platform to collect the W-9 form, but make sure you have the ability to easily export the information and combine it with the other reward amount to complete the required 1099-MISC.

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Key steps for tax compliance

Making sure your referral program remains tax compliant as you reward your advocates is clearly an important requirement for your company. Understanding and operating within the boundaries of tax compliance also comes with a fair amount of complexity. When selecting a referral marketing platform make sure you have thought through the design of your program. Confirm that the referral marketing platform vendor has the experience, knowledge, and functionality in their solution to fit your program design and keep it tax complaint. It’s important to guarantee that your referral marketing platform can:

• Determine which tax information to collect for each advocate and when to collect it.

• Collect W-8 and W-9 information.

• Trigger the collection of the tax information at registration, first reward, or when $600 has been reached.

• Provide all tax forms and reward information in a simple report so 1099s can easily be submitted.

Bottom line - by making tax compliance an automated functionwithin your referral program you can put all your resources intogenerating direct ROI and growing your business.

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A Step-by-Step Guide to Powerfully Promoting your Referral Program 20

generates revenue growth for sales-driven

partner and employee advocacy into high-quality leads by integrating referrals into marketing and sales processes. Companies like ADP and DIRECTV

acquisition while providing an engaging experience for their advocates.

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