How To Report Cash Income Without A 1099
Part of being human is that we have irrational fears. You know what I'm talking about. After watching that scary movie you can't walk through your house without all of the lights on. Or at some point in your life for some reason, quicksand is going to end up killing you. I think all irrational fears pale in comparison to one of the most widely held fears by young Americans: federal income taxes. You can't tell me the first time you filed your taxes you weren't at least a little scared you handled ALL your social security and medicare taxes right, especially if you didn't use an online self-employment tax calculator. Sending that final tax return to the IRS praying that everything was correct. Well, I am here to dispel some fears/questions that plague freelancers and self-employed independent contractors have while filing their federal tax returns. Today I will be focusing on one main question: how do I report cash income without a Form 1099-MISC?
How The IRS Works...
I'm going to give you an inside scoop on the dealings of the evil IRS if this is your first time filing taxes as a small business owner. When you have certain documents issued to you at the end of the tax year: a Form W2, Form 1099-MISC, pretty much anything that looks like an official document, the IRS is also receiving a copy of said forms. Essentially, the IRS knows a lot about your income situation and is expecting that you report income from certain sources. When you efile your tax return it gets analyzed by a program to ensure you are not trying to dodge any income on any tax forms included in your tax return. So if you do at least that much you will not have a problem with the IRS come tax time. I know that what I just told you leaves a burning question deep within your soul: what about cash payments not reported on IRS Form 1099-MISC?.
Cash Income Not Reported?
I know it's hard for the human mind to fathom but some people in modern times are unethical and don't always abide by the rules. The tax law states that any business income/miscellaneous income/self-employment income needs to be reported because let's face it, they want a piece of that money pie. So as you learned from the prior paragraph the IRS only knows what you have received via business income if they received a Form 1099-MISC from the payer. So if your payer/client said "whatevs" to the tax law and decided not to give you a Form 1099-MISC and just paid you in cash you are stuck with an ethical dilemma... As Shakespeare so eloquently wrote once: to report or not to report, that is the question. Or something along those lines. Per the tax law, you kind of have to.
So as a licensed Certified Public Accountant I recommend that you summon whatever Mother Theresa-esque qualities you have and report this additional income that hasn't been reported properly to the IRS. It's actually pretty easy to do as well! When you file your tax return you will be reporting any business income you receive on Form Schedule C. This form shows the IRS your business income and business expenses. The most important thing on this form is that the total business gross receipts need to be at least as much as the total amount you received from any Forms 1099-MISC that you received for that tax year. To make it as clear how much you need to pay in 1099 income tax, let's run through an example.
Cash Income Scenario
You received two 1099's. One of the 1099's reported nonemployee compensation of $5,000. The other Form 1099-MISC reported nonemployee compensation of $1,000. Let's avoid the common core addition here to save us a couple of hours and add it up the old fashioned way. You now have gross income from Forms 1099-MISC of $6,000. So when you go file taxes you know that the IRS is going to be looking for at least $6,000 in gross income on your Form Schedule C or Schedule C EZ.
Now let's assume that you have additional cash payments received of $2,000 in excess of your Form 1099-MISC. All you have to do is add that $2,000 in that gross receipt line in your income tax return for a total of $8,000. It'll technically be different than what the IRS has on record, but they really could care less about you reporting more income than what was reported for them, because they are going to get a bigger piece of the pie in income tax and self-employment tax.
Remember to Report Your Cash Income
I hope that the example above helps you understand how the IRS is looking for errors on your returns and also how to stay compliant with the tax law. A couple of more things to remember while preparing your tax return and getting your Schedule C finished is to include all of your 1099 business write offs as well as all of your business income. Business expenses will offset your self-employed income and result in a lower tax bill at the end of the day.
For a walkthrough of different business expenses to look out for feel free to check out Keeper Tax's free tools and articles. If you are looking for something to help track all of your income and expense items they also have a great product that allows you to stay hands-off and keep your focus on your business. Check out their article for an in-depth review on how to handle your taxes as an independent contractor or small business owner.
I wish you the best in all of your freelancer endeavors and hope that you never have to have irrational fears about tax again! If you have any additional questions I advise you to contact a tax professional.