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Updated January 16, 2021

What is Cash Back?

Cash back, or cashback, often refers to the cash benefit paid to a credit card user after a certain amount is charged on their credit card. The cash back reward is offered by card issuers as a loyalty program to encourage the cardholder to use their card more frequently. Beyond credit cards, consumers may also get cash back rewards by using rebate or cashback sites such as Ebates.com, shopathome.com, and FatWallet.com, among many others.

How Does Cash Back Work?

Often credit card issuers partner with supermarkets and merchants to offer cash back rewards to card users. Cardholders can earn 5% or more of the purchase price, depending on what the credit card offers.

For example, let's say you have a cash back credit card that offers 3% cash back on gas, 2% cash back on groceries, and 1% cash back on everything else. If you spend $100 on gas, you'd get $3 back in cash back rewards. If you spend $100 on groceries, you'd earn $2 back. And if you spent $100 on anything else, you'd get $1 in cash back rewards.

Cash back rewards can be given to the cardholder as a statement credit, cash sent to the consumer’s bank account, or a check sent in the mail. 

There are limitations with cash back rewards, depending on the card issuer. Some cash back rewards can only be used to make a specific type of purchase or a purchase from a specific vendor. Card issuers may also limit the amount of cash back you might earn from a specific kind of purchase like gas or groceries. For example, the card issuer may offer 4% cash back on gas, but only up to $10,000 charged per year, which would limit the cardholder's potential reward to $400 (4% of $10,000) per year in this example.

Some offers are only good for a limited period of time in order to establish loyalty to a particular credit card. After that initial period, cash back may diminish and rates or other fees may increase.

How Cashback Sites Work

Rather than using credit cards to earn cash back rewards, consumers may also get cash back or "rebates" through websites such as Ebates.com, shopathome.com, and FatWallet.com, among many others.

To start earning cash back, you'd simply sign up on a cashback site and use the site's online directory to shop for items from your favorite brands and retailers.

For example, let's say you like shopping at Old Navy. You'd sign on to the cashback site to learn that Old Navy is offering 2% cash back if you are to make a purchase through that cashback site. If you were to buy $1,000 in Old Navy items through the cashback site, you'd earn $20 in rebates or cashback rewards, usually paid to you at the end of the month or quarter depending on the cashback site.
 

Are Cashback Rewards Considered Taxable Income?

No, cashback rewards aren't considered taxable income and are not subject to income tax.

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Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Cashback, then please ask Paul.

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