How Do Tax Referrals Work and Are They Taxable Income?
Understand how tax referral payouts work, how they compare to other income types, and what you need to know about tracking and reporting them for taxes.
Companies offer financial incentives for referring new customers, commonly known as referral payouts. These payments come from banks, investment platforms, tax professionals, and other businesses using word-of-mouth marketing.
Earning extra money from referrals is appealing, but it’s important to understand how these payments are treated for tax purposes.
Qualification for a Tax Referral Payout
Eligibility depends on a company’s terms. Some require the referred person to complete an action, such as signing up for a service or making a purchase. A tax preparation firm, for example, might offer a $50 bonus only if the new client files a tax return.
Certain programs have restrictions. Some financial institutions exclude employees or existing customers from earning rewards or cap bonuses to prevent excessive payouts. A bank may limit referral earnings to $500 annually.
Payouts vary in form, including cash, account credits, gift cards, or discounts. Non-cash rewards are still taxable based on their market value.
Referral Payments vs. Other Income
Referral earnings are taxable but differ from wages. Unlike payroll income, which has automatic tax withholdings, referral payments are classified as miscellaneous income and must be reported separately.
If total referral earnings exceed $600 in a year, the company must issue a Form 1099-NEC or 1099-MISC. Even if earnings fall below this threshold and no tax form is provided, recipients are still responsible for reporting the income.
Referral payments are taxed as ordinary income at rates ranging from 10% to 37% in 2024. If referral activity resembles a business, the IRS may classify it as self-employment income, requiring payment of self-employment tax, which covers Social Security and Medicare contributions.
Tracking Referral Earnings for Taxes
Keeping records of referral payouts is essential. Since companies may not issue tax forms for smaller amounts, individuals should track their own earnings. A spreadsheet or financial app can help organize payment details.
Bank statements and payment confirmations provide reliable records, especially for direct deposits. If payments come in the form of gift cards or credits, recipients must document their market value. Promotional emails or payout terms can help establish these values.
Self-employed individuals earning frequent referral income may benefit from tracking related expenses. Costs like online ads or website maintenance could be deductible, reducing taxable income. Proper record-keeping ensures deductions are well-documented in case of an IRS inquiry.
Reporting Referral Income
Referral earnings must be reported as taxable income, even if no tax form is issued. The IRS categorizes this income under “other income” on Form 1040, Schedule 1, Line 8z. If classified as self-employment income, it should be reported on Schedule C, where deductions for related expenses can also be claimed.
If referral income is substantial, estimated tax payments may be required to avoid underpayment penalties. The IRS mandates quarterly estimated payments using Form 1040-ES for individuals expecting to owe at least $1,000 in taxes after withholding and credits. Failure to pay on time can result in penalties based on the underpaid amount and the length of the delay.
State tax obligations should also be considered. Many states follow federal tax laws on miscellaneous income, but some have additional reporting requirements or different tax rates. California, for example, taxes all income at ordinary rates, while states like Texas and Florida, which do not have personal income taxes, still require federal reporting.