How to File Taxes When Paid in Cash

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You might be tempted not to pay income tax on cash payments because cash is more difficult to trace than payments by check or credit card. Regardless of what form your income takes, you are required to report it on your annual tax return and pay any taxes you owe. You should take particular note of this if a client who paid you in cash files a 1099-MISC form reporting the payment to the Internal Revenue Service. Likewise, if you are paid cash for work that you performed as an employee and your employer has not deducted taxes, you are still liable for the payment of income tax on those earnings, and your employer is subject to prosecution for payroll tax evasion, which is a very serious crime in the eyes of the IRS.

Keep a detailed record of all cash payments you receive. If you are an independent contractor, write receipts for cash payments and keep them on file. If you are an employee and your employer pays you in cash and deducts federal and state withholding taxes, save your pay receipts and the W-2 forms that you receive at the end of the year.

File a Form 1040 Schedule C at the end of each tax year if you are own a sole proprietorship or are self-employed. Include your cash income as well as receipts from checks and credit card sales when calculating your gross income.

File state and local tax returns and pay those taxes as required. Include your cash receipts along with your income from other sources when calculating your gross earnings.

File your Form 1040 income tax return annually. Include cash income in the gross earnings you report and in the business income that you calculate.

Warnings

  • If you own your own business, you might think that you’ll save money by not reporting cash income. While this might be true, it is illegal; and if you ever are audited by the IRS, the penalties and interest on this undeclared income will be considerably greater than any savings you might realize. In addition, failing to report cash income can decrease the value of your business if you ever decide to sell it. Cash income that you don’t report won’t count toward the gross receipts of your business, making the company worth less on paper than it really is.

References

About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.

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