Excel Formula for Reporting 1099-MISC Income from Business Credit Card Referrals

If you have received a referral bonus from a business credit card issuer, you may wonder how to report it on your tax return. Depending on the type and amount of the bonus, you may receive a Form 1099-MISC from the issuer, which reports the bonus as miscellaneous income. Alternatively, you may not receive any tax form, but you still have to report the bonus as income.

The question is, how do you classify the bonus income on your tax return? Is it Schedule C income, which is subject to self-employment tax, or is it interest income, which is not? The answer depends on the nature of the referral program and the relationship between you and the issuer.

According to the IRS, referral bonuses are taxable income, regardless of whether they are paid in cash or points. However, the IRS does not provide clear guidance on how to categorize them. Generally, there are two possible ways to treat referral bonuses:

• As Schedule C income, if the referral activity is part of your trade or business, or if you receive the bonus in exchange for providing a service to the issuer. For example, if you are a blogger who regularly promotes credit cards on your website, and you receive a referral bonus for each successful application, you may have to report the bonus as Schedule C income. This means you will have to pay self-employment tax on the bonus, as well as income tax. You may also be able to deduct some expenses related to the referral activity, such as advertising or web hosting costs.
• As interest income, if the referral activity is not part of your trade or business, and if you receive the bonus as a reward for being a loyal customer of the issuer. For example, if you are a personal user of a credit card, and you occasionally refer your friends or family members to the same card, you may be able to report the bonus as interest income. This means you will only have to pay income tax on the bonus, not self-employment tax. You will not be able to deduct any expenses related to the referral activity.

The distinction between Schedule C income and interest income is not always clear-cut, and it may depend on the facts and circumstances of each case. Therefore, it is advisable to consult a tax professional if you are unsure how to report your referral bonus.

Procedures

To report your referral bonus on your tax return, you will need to follow these steps:

• Determine the amount and type of the bonus. If you received a Form 1099-MISC from the issuer, you can use the amount reported in box 2 (royalties) or box 7 (nonemployee compensation) as the bonus amount. If you did not receive a Form 1099-MISC, you will have to estimate the fair market value of the bonus, based on the cash value or redemption value of the points. You will also have to determine whether the bonus is Schedule C income or interest income, based on the criteria discussed above.
• Report the bonus on the appropriate form. If the bonus is Schedule C income, you will have to report it on Schedule C (Form 1040), Profit or Loss From Business, along with any other income and expenses from your trade or business. If the bonus is interest income, you will have to report it on Schedule B (Form 1040), Interest and Ordinary Dividends, along with any other interest income you received during the year.
• Calculate the tax on the bonus. If the bonus is Schedule C income, you will have to calculate the self-employment tax on the bonus, using Schedule SE (Form 1040), Self-Employment Tax. You will also have to include the bonus in your adjusted gross income, which will affect your income tax and other tax credits and deductions. If the bonus is interest income, you will only have to include the bonus in your adjusted gross income, which will affect your income tax and other tax credits and deductions.

Example

To illustrate how to report a referral bonus on your tax return, let us consider the following scenario:

• You are a personal user of the Chase Sapphire Preferred card, which offers a referral bonus of 15,000 points for each successful referral, up to a maximum of 75,000 points per year.
• In 2020, you referred five friends to the card, and they all applied and got approved. You received a total of 75,000 points as a referral bonus, which you valued at $750, based on the redemption value of the points for travel through Chase Ultimate Rewards.
• You did not receive a Form 1099-MISC from Chase, and you did not engage in any other referral activity or trade or business related to credit cards.
• You had no other interest income or Schedule C income in 2020.

Based on these facts, you decide to report the referral bonus as interest income, not Schedule C income, because the referral activity was not part of your trade or business, and you received the bonus as a reward for being a loyal customer of Chase. Therefore, you will follow these steps:

• Report the bonus on Schedule B. On line 1 of Schedule B, you will enter $750 as the amount of interest income you received from Chase. You will also check the box on line 8, indicating that you did not receive a Form 1099-INT or 1099-OID from Chase.
• Include the bonus in your adjusted gross income. On line 10 of Form 1040, you will enter the total amount of interest income you reported on Schedule B, which is $750. This amount will be added to your other sources of income, such as wages, dividends, and capital gains, to calculate your adjusted gross income.
• Calculate the tax on the bonus. Assuming you are single and have a taxable income of $50,000 in 2020, your income tax on the bonus will be $750 x 22% = $165, which is the marginal tax rate for your income bracket. You will not have to pay any self-employment tax on the bonus, since it is not Schedule C income.

To help you visualize how to report a referral bonus on your tax return, you can use the following Excel table, which summarizes the scenario and the calculations discussed above: