Tax Rules to Know If You Give or Receive Cash
As the American workforce shifts away from a full-time employee model to a gig economy where workers earn income from a patchwork of different projects, tax time can be more complicated.
If you work odd jobs to supplement your income -- say a neighbor pays you for dog walking, tutoring or house cleaning -- then you're still supposed to report that money as income to the IRS even if you're not getting a W-2 (the income-reporting tax form used for employees) or 1099 (the income-reporting tax form used for independent contractors).
"Whether you get it in cash or check, if you're performing a service and getting paid for that, it's income," says Paul Gevertzman, a partner at the accounting firm Anchin, Block & Anchin in New York. "You're required to report it, and that's your responsibility, whether or not anybody else reports it."
Here's a look at what you need to know about giving or receiving income through person-to-person transactions.
If You Give Cash Payments
Say you pay a babysitter or nanny to watch your children. Many parents may not realize that they need to take some extra steps to comply with tax laws. "If someone, like a nanny, works out of your house on a full-time basis and doesn't have a business, they're supposed to get a W-2 from you," says Andrew Schwartz, founder of Schwartz & Schwartz, an accounting firm in Woburn, Massachusetts. The deadline for issuing W-2s to employees this year was Feb. 2.
To determine whether the IRS views your child care provider, gardener, cleaner or other worker as a household employee, Gevertzman suggests looking at how much control and autonomy the person has. "Do they perform it for others on a regular basis?" he asks. "Do they come to your house, or do you drop the kids off at their house? Are they operating it as a business, which would lean towards being an independent contractor?"
If you're paying an individual at least $1,900 a year, you're also legally supposed to withhold Social Security and Medicare taxes from their pay and pay the employer portion of those taxes, just as a company would do for its employees. "You have to file paperwork, and states have different rules than the IRS," Schwartz says. "Some states have quarterly filings, but in Massachusetts, it's actually monthly." IRS Publication 926 details the tax laws around household employees.
If You Receive Cash Payments
If you're the one receiving funds through a person-to-person transaction, then you need to keep track of those payments and tips whether or not you're issued a W-2 or 1099. "If they're a cab driver, they may want to keep track of tips not reported to their employer. A bartender is supposed to report all their tips to their employer," says Andrew Poulos, principal of Poulos Accounting & Consulting near Atlanta. "If they get tips that are not reported to the employer, they are still legally supposed to claim those tips on Form 4137 with their tax return." IRS Form 4070 is a different form that's used for reporting tips to an employer, and employees who receive at least $20 in tips in a month are expected to file on the 10th of the following month.
Money earned through services like TaskRabbit.com is also taxable (though you'd receive payment via check or PayPal, not in cash). If you run a side business or a full-time business -- say you freelance as a graphic designer, writer or chef -- then you may need to file Form 1040 (Schedule C) with your tax return.
"Disclose all your income accurately," Poulos says. "Cash-based business gets audited, and they're not just going to go based on the 1099. They're going to go based off of bank statements, and if you report that you've made $30,000, and they get your bank statement and start adding up the deposits [that don't match], you could be in hot water."