Do I Need to File Taxes if I Get Paid Cash?
If you work for a company that pays you ‘under the table’ in cash, you may wonder if you have to pay taxes, and if so, how?
First things first – you must pay taxes on any income you earn. No matter how much money you earn, if it’s not from an employer, the IRS considers you self-employed and you must file Schedule C on your tax returns.
What is Schedule C?
If you don’t receive a W-2 from an employer, you’ll complete Schedule C on your tax return. Schedule C is an additional tax form that you use to claim any income that isn’t reported on a W-2.
You’ll be responsible for paying your personal income taxes and self-employment taxes on the income, which is 15.3%.
The good news is, though, you can deduct any job-related expenses you experience. For example, if you painted houses for someone and you had to supply your own ladder, paintbrushes, and tarp, you could deduct the cost of these expenses if you keep receipts.
How to Pay FICA Taxes
Many people wonder if they get paid cash, how will they pay their FICA taxes? FICA is Social Security and Medicare taxes, which when you work for someone, that employer pays half for you. As an independent contractor, you’re responsible for the payments.
If you don’t pay your share of Social Security and Medicare taxes, you may not have enough credits to qualify you for these supports when you’re in retirement.
You’ll complete Form SE to determine how much you owe in FICA taxes, but it’s equal to 15.3% of your earnings. Anyone that earns over $400 in cash must claim it on this form.
How your Income is Reported
Some companies that pay cash provide a 1099-NEC. This is how employers report income they paid ‘under the table’ and didn’t withdraw taxes from. You should verify the amount reported on the 1099 to what you earned. If you received more than what the employer reported, you must report the higher amount. If the 1099 is for an amount higher than you received, you must contact the person who issued the 1099 to get a corrected form. Typically, the two numbers match, though.
Not all companies provide 1099s or if they do, they don’t account for all income. It’s a better idea to keep track of your income throughout the year yourself. Since your taxes are your responsibility, it’s important to keep track so you know how much you must claim each year.
What to Consider if you Get Paid Cash
· Report every penny you receive even if you don’t receive a 1099 from every person or company that paid you
· Keep track of your expenses so you can deduct them from your income to reduce your taxes
· File your taxes on time
· Put aside 25% of the cash you get paid to account for the taxes you’ll owe
If you get paid cash, you have your work cut out for you. Everyone must pay taxes on their income no matter how they’re paid. If you do something that doesn’t require an employer and isn’t from a company that issues 1099s, make sure you report the income yourself and pay the appropriate taxes – you’ll thank yourself when you’re in retirement and need the support of Medicare and Social Security.
For more information or assistance with tax planning or preparation, reach out to the experts at Henson and Murtha CPAs.