The best source of new members is arguably current membership. If they have found pleasure in belonging, they will proudly serve as ambassadors of the club. They will sport clothing with the club’s insignia like a college’s alumni who return for homecoming games. They will bring guests in on the weekend. And they might even vocalize their satisfaction.
Realizing that prospective members are also most likely to be sold on the concept of joining when approached by a trusted friend, many clubs have considered and possibly already implemented programs to encourage the above stated behavior. Furthermore, clubs welcome peers of current members who are in good standing in the spirit of the old idiom about “birds of a feather.”
These are tremendous observations and a solid foundation for marketing a club. Carpe diem! Seize the opportunity to grow membership and explore ways to encourage members to promote the club. No question exists about the merits of this behavior.
There is, however, reason for pause in how clubs provide and account for any incentives offered. The term that inevitably creeps up is tax implications.
Several clubs continue to explore various options and pose questions about “ambassador credits” as well as a variety of other terms used to describe some form of referral compensation. A club might, for example, offer a member $100 per month as a reward for bringing in a new member. Potential trouble arises from the fact this $100 per month surpasses the $600 per year threshold that necessitates the club’s issuing a Form 1099 Misc. as it essentially pays the current member for this referral. Clubs addressing this scenario should present that $100 per month as a prize or award so that it is not seen by the Internal Revenue Service (IRS) as self-employment. When issuing that required Form 1009 Misc., the club should utilize the box for other income instead of non-employee compensation.
Looking at incentives offered to new members (e.g. offering a discount in the form of a credit to new members), the IRS has issued an announcement that promotional rewards will not be pursued as taxable income. This point warrants reiterating as it is important to note that this was not a specific ruling that states it is not taxable income, but was instead an announcement that it will not be pursued as such.
A bigger issue exists in whether offering new members a discount constitutes an inurnment of benefits to members, which would jeopardize a club’s 501(C)(7) status. To address this concern, clubs are advised to adjust the initiation fees for new members instead of offering a discount as an incentive and thereby eliminate any potential for problems.
The complications can vary from one club to the next as programs are often unique. Clubs should continue to be innovative in pursuit of new members. Explore all options. Leverage all assets. In short, go for the gold. Just remember to consider all of the implications along the way.
Bob Salmore is a director with McGladrey. He has more than 30 years of experience in providing audit, accounting and operations consulting to the hospitality and club industries.
