Are Cashback Rewards Taxable? All You Need To Know About Cashback Taxes

Hopefully, my title grabbed your attention. I’m sure I’m not the only one who is curious if cashback rewards are taxable or not. 

It’s not uncommon for people to wonder, “Are cashback rewards taxable by the IRS?” This question is a popular search term on Google and it’s also one I get frequently. 

It’s an important question that people should know the answer to before they spend thousands of dollars of their hard-earned money on cashback rewards.

What are cashback rewards?

Cashback rewards are credits given to a shopper for purchasing a product. They can be given in the form of cash, store credit, or other non-monetary perks, such as discount coupons.

A cashback reward can also be defined as a commission that a network marketing company pays to its distributors for sales made through their own marketing efforts.

Cashback rewards are a way to earn cash or eGift cards when you make purchases through select online retailers. With over 1,000 stores available, there’s always time to earn! 

You can receive your cashback as a direct deposit into your bank account, an Amazon.com Gift Card (in your choice of denominations), or an American Express® Reward Card.

Are cashback rewards taxable?

Cashback rewards are a great way to save money on an already discounted product. It’s one of the best perks of credit cards. But, are cashback rewards taxable? 

This can be a trick question since many cashback programs don’t classify their rewards as income or wages. Knowing whether you’ll be taxed on your cashback rewards will help you keep more of your money each year.

Cashback rewards can be a great way to save money on purchases that you were going to make anyway. And it can be one of the main benefits of using credit card rewards programs. While many people think about these rewards as a nice little bonus or extra, they often forget that these rewards are taxable. 

A lot of people don’t realize it at first, but if you earned a lot of cash back by making thousands of dollars worth of purchases, you likely have to pay Federal income tax on these rewards.

If you earn a rewards bonus for a purchase, this could be paid for by using your credit card or balance transfer then the cashback reward is likely to be taxable. 

You should always check with the bonus provider (card company) and/or HM Revenue & Customs (HMRC) to make sure that you understand exactly what is levied and whether or not you need to declare it as part of your income tax return. 

Who needs to claim income and prizes?

When you redeem cash back rewards, the bank processes the transaction as a purchase. By law, you’re required to claim income and prizes on your tax return that are in excess of $600 (Usually, all that is needed is a tick or a cross on a form). 

If you fail to do so, the government will recover any debt through our standard recovery procedure (this includes payment by garnishee and/or seizure of money from any bank account).

Where to report cashback income?

For tax purposes, you should report your cashback income as ordinary earned income. Some credit card issuers will report your cashback bonuses directly to the IRS so that you can include them on your tax return. 

However, it isn’t uncommon for a few not to report it. It is possible to get a statement from the credit card company that includes your rewards and submit it with your taxes.

Pursuant to IRS regulations, cashback income should be reported on your tax return using the same method you use to report other income. Cashback can be reported on Line 21 of IRS Form 1040. 

For cashback received over a period of time, it is acceptable to include in income only the amount you received in the year that it was credited to your account.

Taxpayers are required to report any cashback income from any source, on a 1040 Individual Income Tax Return in the year in which the payment was received. 

However, as a general rule, taxpayers report all income earned in the tax year in which it is received. This may differ slightly depending on how the cashback is paid. 

How much will I pay in taxes?

Unfortunately, we cannot guarantee that you will be able to avoid paying taxes on your cashback rewards. Federal, state, and international tax laws can vary significantly depending on your country of residence. 

Furthermore, the interpretation of tax laws may be subject to the whims of the ruling government at any given time.

Cashback rewards are paid in the form of a statement credit. Depending on where you live, the amount of tax you’ll pay on these rewards varies slightly. 

For example, if you live in Alabama, your state tax rate is 4%. This 4% will be deducted from your cashback rewards payment. If you are in the 24% federal tax bracket, then 24% will be deducted from your cashback rewards payment as well. 

On the other hand, if you live in Texas and are in the 28% federal tax bracket, then only 20% will be taken off.

Tips for self employment taxes

Cashback services are great for shopping, cheap or free travel, and even paying off student loans. However, it’s important to pay estimated taxes as a self-employed person.

As a self-employed worker, you have to pay your taxes on cashback rewards yourself. This might seem weird at first—pay taxes on the money you already paid taxes on? But it’s true, the IRS considers cashback rewards to be supplemental income. 

This means there are special rules for reporting it along with any other business income you receive.

Self-employment taxes are taxes paid by individuals who work for themselves. These individuals have the choice of paying Social Security and Medicare taxes either through withholding from employee paychecks or by contributing that money to the government as self-employment taxes. 

Anyone earning $400 or more a year from self-employed endeavors must pay these taxes.

Self Employment tax deductions may be available to you if you are a small business owner; Be aware that the self-employment tax includes paying both the employee and employer portions of the Social Security and Medicare taxes.

The amount of self-employment tax you may have to pay depends on your net earnings from self-employment.

Keep track of your earned income in a safe spot. The IRS states that self-employed people must pay one-half of the social security and Medicare taxes that an employer and employee pay: 12.4% of your annual net earnings from self-employment plus 2.9% of your annual net earnings from self-employment. 

A safe spot to keep track of what you owe is by creating a spreadsheet. The spreadsheet should include the year, date of payment, the amount owed, and due date. If you do not keep up with what you owe, it can get confusing!

FAQs

Is cashback free money?

No. Cashback simply means you get some of your money back–in this case, the price you paid for the item. It’s free money only if you actually paid cash for the item in question. 

You may have bought your item on credit, in which case, you didn’t actually spend any money on it (you spent someone else’s).

What stores give free cashback?

There are many different stores that offer the ability to shop and earn cashback rewards and rebates online.

Most stores give you cashback in the form of a gift card, and some even give physical cash. The best part is that you can even use the gift cards to shop from those very same stores again! We know, it’s a win-win!

How do you make money with cashback?

You collect cashback by doing the things you do every day. Browse products, shop online, try new restaurants and compare travel prices through our Discover partners. 

When you purchase something through our commerce platform, we make a slight adjustment on your behalf to redeem the cash back you’ve already earned.

Conclusion

It is very important to know your tax strategy before earning rewards can save you money. Some cards offer cashback or merchandise and some only offer travel rewards. 

Naturally, we all want to keep more money so packing your tax bag (knowledge) before completing any transaction is recommended.