How to Report Cash Income Without a 1099

by
Robby Nelson, CPA
Updated 
September 21, 2022
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It's not uncommon for freelancers and independent contractors to get paid in cash. 

If you've got clients who prefer to do things that way, they won't send you the usual 1099-NEC reporting what they paid you.

Unfortunately, not having a 1099 form for your earnings doesn't mean you can skip reporting them. The IRS counts cash payments as part of your self-employment income. That means you're still expected to report it — and pay taxes on it. 

Contents

Tax forms for reporting income

For your typical American taxpayer, there's nothing more confusing — or more frightening — than federal income taxes. That goes double for self-employed people, like freelancers and small business owners. If you work for yourself, you have to navigate tax season with no withholding, a hefty self-employment tax bill, and a baffling array of extra tax forms. 

Traditional employees get W-2s from the employers at the end of the tax year. These forms report all the wages, salaries, and tips they earned.

If you're self-employed, though, you'll get Form 1099-NEC instead. Expect one of these from every platform or client that paid you at least $600 for your work. The NEC stands for "Nonemployee Compensation," meaning you performed services for them on a contract or freelance basis. (This form has taken over for Form 1099-MISC, which is now used for miscellaneous income.)

Tax documents like the 1099-NEC are called "information returns." The IRS will also get a copy of every information return you receive — which makes it hard not to report that income when you file.

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But what happens if you earn some income that isn't reported on a 1099?

What to do with self-employment income not reported on a 1099

Technically, the IRS will only know about your business income if it's reported on a 1099-NEC or 1099-K form. Without an information return, it's completely in the dark when it comes to your earnings.

This can make things confusing for gig workers who get paid in cash. 

Ultimately, your cash income from self-employment still counts as taxable income. Even loosely self-employed individuals who work part-time — say, babysitting on the weekends — are expected to report what they make. 

This isn't too surprising if you think about the tax law around 1099s in general. Plenty of self-employed people end up not getting 1099s from their payers, for any number of reasons: they made less than $600, their work platform had an old mailing address, or the company they freelanced for just... forgot.

In cases like these, you're still expected to report your earnings on your tax return. Cash income is no different.

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Keeping track of your cash income

It's hard to report your cash income if you don't know exactly how much you made.

That's why it can be helpful to keep a log of your cash earnings. It's especially a good idea for any tips you got paid in cash, since those tend to vary in amount. That's why the IRS created an easily accessible form for taxpayers to use to log their tips.

To be clear, the IRS doesn't require you to track your tips this way — it's just a recommendation. It's preferred tip log format includes:

  • The date you got the tip
  • The amount you were paid
  • The payment method

In practice, though, tips you receive through credit card and check are easy enough to track through your bank statements. All you really need to log is what you got in cash.

You can use the exact same format to track all your cash payments — not just your tips.

Reporting cash income

It's not hard to report cash income when you file your taxes. All you'll need to do is include it when you fill out your Schedule C, which shows your business income and business expenses (and, as a result, your net income from self-employment).

To report your cash income, just include it with your "gross receipts" on line 1 of the form. This is also where you'll enter any income that you do have 1099 forms for.

How to Report Cash Income Without a 1099 | Part I of Schedule C for self-employment income

Including cash income in your gross receipts

Pro tip: Make sure the total you enter for "gross receipts" is at least as much as the total amount you have reported on 1099s. Here's an example of how that works.

Say you received two 1099-NECs from freelancing clients. One of them reported $5,000 in nonemployee compensation, while the other reported $1,000. Together, that's $6,000 in income that the IRS already knows about. 

Now, let's assume you also made some additional income that isn't reported on any 1099s: say, $2,000 in cash from several smaller gigs. 

When you report your total self-employment income, you'll add that $2,000 to the $6,000. This gets you a gross income of $8,000. 

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How to lower your tax bill after reporting cash income

As you know now, keeping quiet about cash payments isn't a valid way to lower your tax bill. However, there is a 100% legal way to reduce your taxable income and pay the IRS less of your money at tax time.

All you have to do is claim your business write-offs. Here’s how that works.

When you enter your cash earnings on your Schedule C, you might find yourself looking at a gross income that feels uncomfortably high. Luckily, though, you won't have to pay taxes on all of it.

You're only taxed on your net profit from self-employment. That means you get to subtract everything you spent on running your business or doing your contract work, from your home office to your cell phone.

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If you'd like a way to track all these write-offs automatically, try Keeper Tax. Our app finds business expenses in your purchases, so you can write them off without keeping a spreadsheet. 

That leaves you more time to focus on growing your business — whether or not you're being paid in cash.

What happens if you don't report your cash income

If you fail to report all your cash income, you might be on the hook for penalties. These amount to a 50% penalty on the late FICA taxes, and up to 25% on late income taxes — plus any additional interest.

Of course, these penalties are only assessed if you actually owe tax. What if you you ended up with a loss, and the additional money isn’t enough to turn the loss into a profit? In that case, you won't owe any tax or penalties.

If you're worried about past years, keep in mind: the IRS only has three years from the time you file your return to audit it. Once that time is up, the return is closed and generally can't be audited.

There's also generally no need to amend a 1099 return you filed last year because you forgot to report $200. As long as it’s not substantial money, the IRS won't care.

Bottom Line: Now that you know better, report all your income.

Robby Nelson, CPA

Robby Nelson, CPA

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When not hanging out with his high profile friends like Gandhi or Batman, Robby enjoys spending time with his wife and children. He can sneeze with his eyes open, has won two lifetime achievement awards, and has visited every country; three of which haven't been discovered yet. He is also a Certified Public Accountant and assists clients with a wide variety of accounting and tax issues.

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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email support@keepertax.com if you have questions.