In the US, cash-equivalent referral incentives—like gift cards, prepaid cards, cash back, or account credits—count as taxable income. Yet many companies overlook this. If you don't track payouts or handle tax forms properly, you could end up facing unexpected fines and compliance headaches.
When Referral Bonuses Become Taxable
If you pay a customer more than $600 in referral bonuses in a calendar year, the IRS treats that as taxable income.
Here's what else to know:
- Cash isn't the only taxable reward—gift cards, prepaid debit cards, and account credits are considered "cash equivalents" and are taxable income, regardless of the amount.
- Branded merchandise and other non-cash rewards may also be taxable, depending on their fair market value.
- State tax rules may also apply—some states have additional tax reporting requirements for referral rewards, so be sure to check local laws.
Do You Need KYC for Referrals?
The $600 threshold is the critical compliance trigger. Once a customer earns $600 or more in referral rewards in a calendar year, the IRS requires you to report those payments as taxable income. Here's how to stay compliant, step by step:
- Log all payouts: Track every referral reward—cash, gift cards, credits, or merchandise—by customer and calendar year. This is non-negotiable.
- Disclose tax implications upfront: Include a clear clause in your referral program's terms and conditions stating that referral rewards may be considered taxable income, and recipients are responsible for reporting them.
- Set up an automated compliance trigger: Use your referral platform or CRM to flag customers approaching $600 in rewards. For example, trigger an alert at $500 earned, giving you time to collect the necessary forms before the $600 threshold is crossed.
- Collect a W-9 Form before payouts exceed $600: The W-9 collects the recipient's taxpayer identification information, which you'll need to prepare a 1099-MISC form.
Without a W-9, you risk penalties for improper reporting—and you may be required to withhold backup taxes. - Issue a 1099: Any customer who earns $600 or more must receive a 1099 by January 31 of the following year. This form reports their total referral earnings to both the recipient and the IRS.
How to Stay Compliant
Failing to issue a 1099 form when required can lead to serious financial penalties:
- $60 per form if you file within 30 days of the deadline
- $120 per form if you file more than 30 days late but before August 1
- $310 per form if you file after August 1 or don't file at all
- Up to $630 per form if the IRS determines your failure was intentional
These penalties can quickly stack to thousands of dollars, especially as your referral program scales. The best way to avoid them? Set up automated processes to track payouts, collect W-9 forms, and generate 1099 forms by the January 31 deadline.
Additional resources
- About Form 1099-MISC: Overview of the form you must file for referral bonuses over $600.
- About Form W-9: The form you'll need to collect from customers before issuing a 1099.
- Information Return Penalties: Penalty amounts for failing to file or filing incorrectly.
- General Instructions for Certain Information Returns: Comprehensive instructions on filing 1099 forms, including 1099-MISC.
How Flock can help
Flock makes it easy to keep your referral program compliant—without slowing down growth. Want to see how it works? Book a demo to learn how Flock helps you grow faster and stay compliant.