Hi @ThreadsofHope

This is a great question that can cause some confusion when selling/redeeming Square Gift Cards. 

The sale of a gift card is recorded separately from your product sales. Your gross and net sales will exclude gift card sales since gift cards aren't necessarily a product. 

Your Total Collected report will reflect all amounts taken, including tax, tip, and gift cards, so that would be a better report for you to reference. 

As we close 2018 tax season which transaction, the sale or the redemption, is counted as taxable income?  In the Sales summary by month reports Square is generating it looks like GC sales are counted as income. Im even more confused because the GC redemptions are also listed where form of payment is broken down. Who can help me understand this?

@ryanwanner's answer was spot on.  Typically, sales of the actual gift card are not considered income, only the redemption of the card is income.  If Square is showing both transactions as income, something is wrong and you need to contact their customer support to get it figured out.  As far as the tax issue, make sure that the sale of the GC is non-taxable.

I hope this helps and you get this straightened out.  No one enjoys dealing with the IRS.

@GlassJudy glassdale I agree the GC Sale should not be income...at least according to the IRS...however when I look at my sales summary by month the GC sales are indeed counted under income. Am I wrong?

@ryanwanner Ryanwanner Do you use Squares sales summary reports by month? It sure looks to me like the GC sales are counted in the income total at the end of the month. I am very confused and would love some clarification. I've tried calling Square support to no avail and am ready to switch POS systems.

@SMW I do use the sales summary reports.

I think you're getting hung up on the "income" word here versus the "sales" word.

Income, yes, you do receive funds the day you sell a gift card. This will show up in deposit reports and on sales reports as Gift Cards Sold.

However, it does not show up as a sale. The best way to show this is for you to run a gift card on a day you're closed or after hours. If you have a gift card purchase on a closed day, you'll see that your Gross & Net Sales will not move from zero, but your Gift Card Sold sales will increase. You will then receive a deposit the next deposit cycle (if the card was paid for by credit card of course) of the amount of the gift card sale less Square's CC processing fees. If you want to test this after your business hours, make note of your daily gross and net sales plus your GC Sales before and after you process the card. Your Gross and Net sales will be exactly the same and your GC Sales will go up.

Only once the GC is redeemed will the sales show up in your sales report. It is up to you and/or your accountant to keep the GC Sales up to date as a liability on your books. It DOES NOT belong as an Income Item in your books: it's not.

On the Sales Summary Report, the Gift Cards are listed, yes, but only for the reason of giving us merchants a snapshot of what transpired in that time period. Imagine how utterly confused you'd be if the Gift Cards Sold weren't listed here and your deposit didn't match! 🙂

Like @GlassJudy said, though: if your Gross and Net sales go up after processing a Gift Card Purchase, then something is definitely not right with your account and I highly recommend contacting customer support before the hole gets any deeper.

I hope this helps!

@ryanwanner  It WILL help once I read it ten more times. Lol. Thank you VERY much for your detailed explanation. It is so appreciated even if it is not yet understood. 🙂

@SMW LOL yeah, it took a few times of banging my head on my desk to fully wrap my head around it too. 🙂 Let me know if you have any other questions!

@ryanwanner  If I may ask after reading your reply, what have you found to be the best way to get a total of your taxable income either monthly, yearly or otherwise, that does not include those gift card sales?I dont see a report on Square that allows for them to be separated out.

The best way that I have found honestly is to pull my income statement direct from Quickbooks. Since the GC Sales end up not in the income section of the PnL since it's coding as a liability, this is the most accurate way to get the exact numbers.

If you're using the Square reports, your best bet is to not pay attention to the GC Sold line. Like I said, it's just there as a way for you to know where all of the money is coming from.

Hello @PhoenixTMBWY! I merged your question to this thread where a few sellers explain how eGift cards are tracked within your Square system.

Hope their answers help clarify a few thing for you!

Hope I'm not making things worse here, but money is not exchanged in both steps of the gift card transaction (purchase and redemption.)  As @ryanwanner stated above, the sale of the card is not income, the income is only generated when the card is redeemed, and it's at THAT point that money is considered as being exchanged.

Here's what the two steps of the process look like in bookkeeping terms:

1. Purchase of the GC: The customer gives you an amount of money and you give them some form of a GC (card or paper usually).  For bookkeeping purposes, that amount of money gets deposited in the account in which you accrue your undeposited funds (funds awaiting transfer to a different account, generally savings or checking, but it could be one of many other types.)  To balance the books at this step, a liability against your business is entered in an appropriate liability account.  No income is recognized at this point, as you haven't yet really sold anything of value yet - at most you've only made an even exchange.
2. Redemption of the GC: a customer comes in, picks out items to buy and hands you the GC.  For bookkeeping, the items that the customer is buying are exchanged against the previously-created liability.  Notice here, that although no form of official currency is exchanged, it's at this point that the income is created, as you have exchanged items of value for the previous money that the original customer bought the GC with.  This point is the actual income-generating step (the sale of the items) although the money exchanged hands at some point in the past.

I hope this helps clear things up.  The way that I finally understood it is to realize that receiving money is not necessarily the same as generating income.

Sorry for the confusion. Gift card redemptions are not included in 1099k forms, and therefore isn't reported to the IRS. 

Only gift card sales (when they're loaded using a payment card) is reported to the IRS. @Jessdemahy

I’m referring to when money is received. Square just needs to remove the gc reporting feature for redemptions in the reporting area 

Yeah. By received, I assume you mean when the money is loaded onto a gift card. That money is reported to the IRS only if loaded with a credit/debit card. 

That isn't something Square can turn off since the IRS requires those sales to be reported too.

As for Dashboard reports, I hear you and understand reporting can get a bit confusing. Unfortunately gift card redemptions will always be included in Sales Reports. Perhaps, to make it easier, take the number in the Gift Cards Sales line found in the Sales Summary report, as it only includes activations  and excludes redemptions. 

@Jessdemahy