We are creating an employee checking account for which we would credit a small amount to the account for each point of sale (POS) signature- or PIN-based debit card transaction. ATM withdrawals would not qualify for the credit. Would this credit be considered interest, and would we need to track these funds and issue an IRS Form 1099-INT or 1099-MISC?

No, we do not believe these credits would be considered interest or income necessitating the filing of a 1099-INT or 1099-MISC.

Generally, payers of interest income must issue a 1099-INT when interest income exceeds $10 in a calendar year, and payers of income must issue a 1099-MISC when income exceeds $600 in a calendar year. When paid by banks, “interest” refers to “interest on deposits with persons carrying on the banking business.”

We do not believe that credits paid to employee accountholders for making POS transactions would be reportable on a 1099-INT as “interest,” since the credits are not paid on deposits — they are transaction-based. Also, we do not believe such credits would be reportable on a 1099-MISC as income. The IRS has issued a private letter ruling (which is applicable only to the specific taxpayer who requested the ruling) concluding that cash back rewards paid in relation to credit card transactions are considered rebates, not income, since “a rebate received by a buyer from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment in purchase price, not an accession to wealth.” Consequently, we believe the credits paid for POS transactions would be considered rebates on the transactions, not taxable interest or income.

However, we note that the IRS treats bonuses paid for opening accounts as interest that may be reportable on a 1099-INT if it exceeds $10 in a calendar year. In Shankar v. Commissioner of Internal Revenue, the U.S. Tax Court found that noncash award points offered to a customer in exchange for opening an account constituted interest for which the bank correctly issued a 1099-MISC (since the points were exchanged for an airline ticket with a value exceeding the $600 threshold for 1099-MISC reporting). The court described the award as “a premium for making a deposit into, or maintaining a balance in, a bank account,” which was “something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest.” But here, accountholders are not being paid a premium to deposit their money with your bank — they are receiving a cash back reward for each POS transaction they make. Accordingly, we would apply the IRS’s analysis in its private letter ruling on cash back rewards to your program, not the holding in the Shankar case.

For resources related to our guidance, please see:

IRS, Instructions for Forms 1099-INT and 1099-OID (2020) (File Form 1099-INT, Interest Income, for each person: To whom you paid amounts reportable in boxes 1, 3, and 8 of at least $10 . . .”)

Internal Revenue Code, 26 USC 6049(a) (“Every person— (1) who makes payments of interest (as defined in subsection (b)) aggregating $10 or more to any other person during any calendar year, or (2) who receives payments of interest (as so defined) as a nominee and who makes payments aggregating $10 or more during any calendar year to any other person with respect to the interest so received, shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the aggregate amount of such payments and the name and address of the person to whom paid.”)

IRS, Instructions for Forms 1099-MISC and 1099-NEC (2020) (“File Form 1099-MISC, Miscellaneous Income, for each person in the course of your business to whom you have paid the following during the year: . . . At least $600 in: . . . 3. Other income payments (box 3) . . .”)

Internal Revenue Code, 26 USC 6049(b) (“For purposes of subsection (a), the term ‘interest’ means . . . (B) interest on deposits with persons carrying on the banking business . . .”)

IRS Private Letter Ruling 201027015 (April 5, 2010) (“The portion of the credit card purchases that Taxpayers can either receive back in cash or request Company to pay to a charity does not constitute gross income under § 61 . . . Section 61 provides that gross income means all income from whatever source derived. A rebate received by a buyer from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment in purchase price, not an accession to wealth, and is not includible in the buyer’s gross income.”)

Shankar v. Commissioner of Internal Revenue, 143 T.C. 140, 148 (2014) (“Respondent’s counsel added that the omitted income was a noncash award for opening a bank account. We proceed on the assumption that we are dealing here with a premium for making a deposit into, or maintaining a balance in, a bank account. In other words, something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest. In general, the receipt of interest constitutes the receipt of an item of gross income. See sec. 61(a)(4). Receipt of the airline ticket constituted receipt of an item of gross income, and petitioners have failed to show that it was worth any less than $668, which Citibank, which had purchased the ticket, said was its fair market value. . . . On account of Mr. Shankar’s receipt of the airline ticket, petitioners omitted $668 of gross income from the Form 1040.”)