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.