If you have self-employment income or other cash income, here’s how to report it to the IRS. Ps. The IRS can still find out about cash income without a 1099.
What counts as taxable income?
Generally, any money you receive in exchange for goods or services counts as taxable income. It doesn’t matter if your gross receipts come from cash payments or other types of payments.
One common tax myth is that you can call a tip a gift and not pay taxes. If a tip comes from someone you did work for, it counts as a taxable payment for your services. This includes both tips at the time of service and tips included in a holiday card.
One thing that usually doesn’t count as taxable income is selling things in a garage sale. As long as you’re selling your personal items for less than you originally paid for them, you generally don’t have to report income or pay taxes when you hold a garage sale.
Does getting or not getting a 1099 change whether you owe income tax?
Not getting a 1099 for cash income does not mean that you don’t owe taxes. Getting a 1099 for cash payments doesn’t mean they’re taxable payments.
The 1099 is just extra information for the IRS to check what you report at tax time.
You can have taxable income without a 1099, and you can get a 1099 for nontaxable income. When you file your tax return, you have to determine whether your income is taxable.
For example, it’s common for independent contractors to receive cash income from someone who doesn’t follow the 1099 rules or really doesn’t have to send you a 1099. You may also receive less than the $600 minimum amount to receive a 1099. That’s still taxable business income.
Getting a 1099 for nontaxable income is more common with electronic payment services like PayPal, but it can still happen with cash payments. Maybe a small business bought your old desk at your garage sale and insisted on giving you a 1099. That doesn’t mean you owe income tax on the sale.
You may also receive other types of cash payments such as hobby income, lottery winnings, or gambling proceeds. These types of income are usually taxable but don’t count as self-employment income. Don’t assume that getting a 1099 = reporting self-employment income.
Does the IRS know if you don’t report cash income?
It might be easier for the IRS to know a self-employed individual got paid in cash than you think.
You might get claimed as a deduction.
If you’re an independent contractor, the person or business paying you can often claim a tax deduction for your cash earnings. If someone starts claiming a lot of business expenses for contractor payments without issuing 1099s, there’s a good chance the IRS will ask for proof of those payments.
So when a business says it paid Joe the Plumber on Main Street, the IRS will look for a tax return from Joe the Plumber. They’ll then check to see whether you reported that income.
The IRS compares tax returns.
Another way that the IRS can find out if you got paid in cash is by comparing tax returns. If most independent contractors doing the same type of work as you report that 50% of their income is not on a 1099, the IRS might ask why you don’t have any income that’s not on a 1099.
Now, you might have a reasonable explanation. Maybe you don’t accept cash so all of your gross income gets reported on a 1099 and your 1099 income is double that of the other businesses. That’s fine.
But if you just left off business income, there’s a good chance the IRS will be able to tell you didn’t report all your income.
Everyone can be randomly audited.
Finally, you could get randomly picked for an audit. If the IRS looks at your bank statements, they might see two things.
First, they might notice that your deposits are less than your reported income. Second, if you try to trick the IRS by spending your cash instead of depositing it, they can usually figure it out by looking at your expenses. For example, if they see you don’t spend money on food, they know you have to eat and must have hidden cash income.
So in short, yes people can sometimes get away with not reporting cash payments, but the IRS figures it out a lot more often than you may think.
What else happens if you don’t report self-employment income?
If you don’t report independent contractor income and pay self-employment tax, one of the most important things that can happen is reducing your Social Security benefits. Remember, self-employment taxes increase your Social Security retirement benefits.
You may also receive reduced Medicare benefits if you don’t pay enough in Medicare taxes.
Your tax return net profit is also usually the income used to qualify for a mortgage or car loan. So not reporting your full net income could reduce your borrowing ability.
Finally, a lot of self-employed people who didn’t report under-the-table income weren’t able to get COVID-19 relief such as PPP loans or expanded unemployment.
How do you report self-employment income without a 1099?
Reporting self-employment income without a 1099 is actually super easy. If you look at IRS Form Schedule C, there’s only one box to report all of your self-employment income. That’s Box 1: Gross receipts or sales.
Gross receipts or sales include both payments you got a 1099 for and payments you didn’t get a 1099 for. You don’t list out your 1099s on Schedule C. You also don’t include 1099s with your tax return.
The only reason a tax professional or tax software ask for 1099 tax forms is to help make sure you don’t miss anything when filing taxes. All you really need to do is enter your total gross income near the top of your Schedule C.
How do you keep track of your cash income?
There are a few different methods you can use to track your cash income. Many people combine more than one method.
- Always issue a receipt and keep a copy in your records.
- Enter each payment in a log book or accounting software.
- Deposit all cash to your business bank account. Don’t keep cash to pay expenses so your deposits match your total cash payments. If you need cash, make a separate withdrawal.
One of the benefits of using the bank account method is that you can set your accounting software to automatically track your deposits as income. So you won’t need to worry about keeping track of things during the year.
When it’s tax season, all you’ll need to do is copy your profit and loss statement to Schedule C.
How do you claim your business write-offs if you get paid in cash?
The payment method your customers use doesn’t affect what tax deductions you can claim. Tax law allows deductions for ordinary and necessary business expenses no matter how you get paid or pay for your expenses.
As a best practice, try to avoid paying expenses in cash. Checks, credit cards, and electronic payments give you more of a paper trail.
No matter how you pay, you always need to keep your receipts.
If you do pay expenses in cash, try to make a separate ATM withdrawal. While an ATM withdrawal doesn’t prove your expenses, it creates a better accounting record.
One thing you should never do is get paid $500 by a customer, spend $100 on expenses, and only report $400 in income received. The proper accounting method for filing taxes is to report $500 in gross income and include a $100 deduction on Schedule C.
Even though your tax bill will be the same, the IRS wants you to show your work just like your math teachers in school did.
What if you only get paid in cash?
It’s perfectly fine and normal to only get paid in cash. There are a lot of businesses that only accept cash payments.
The rules for reporting cash income don’t change whether you only have cash income or have both cash and non-cash income. Keep track of all of your income, and report it all when you file taxes.
What should you do if you didn’t report cash income?
If you didn’t understand the importance of reporting cash income and left it off of your tax return, you’ll usually want to file an amended tax return. An amended tax return is redoing your tax forms with the correct numbers.
When you amend your taxes, you’ll have to pay an additional tax bill. You may also owe interest and penalties if you’re paying after the original tax deadline.
If you didn’t report cash last year, don’t simply add more income to your tax return this year. You have to put it in the right tax year, or you could still have to pay IRS penalties.
If you haven’t been properly reporting income for multiple years, ask a tax accountant or tax attorney what you should do. There’s a possibility that it could count as tax evasion giving the IRS an unlimited amount of time to charge you back taxes and penalties. However, there may be ways to limit what you have to pay.
