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Irregular income means that the income you receive as an individual or business comes in uneven increments. Some months, your income might be high, and for others, it will be low. If you or your business receives irregular income, you can take steps to help budget for future periods. Since expenses usually occur with regularity, you should make sure you have enough income set aside during lean months to pay them. This also applies to tax planning, because taxes will be due on April 15, and you must have adequate funds set aside to pay them.
Types of Irregular Income
There are several types of irregular income. The most common comes from commissions based on sales. If sales are volatile, your commission income will be volatile. Also, sales in a business can be irregular, which is particularly common in businesses that sell larger single items, such as heavy equipment or machinery. Most customers purchase this type of item on an irregular basis, and therefore the gross sales tend to be uneven. This is contrasted with income like rent, which usually occurs on a regular basis and in the same amount.
Budgeting Irregular Income
One of the best ways to budget for irregular income is to set aside income taxes as soon as the income is received. For example, if you’re in the 25 percent tax bracket, you should consider setting aside 25 percent of the income when you receive it, to pay for the taxes that will be due on the following April 15. After setting aside an amount for taxes, you should then look at the historic trend of the source of your income and try to project your estimated future proceeds. You may want to look back several years, and also take into account the status of your income source. You’ll need to estimate whether you’ll be receiving more or less income in the future from that source.
Reporting Irregular Income
Income in a business is reported on Schedule C of your federal tax return, "Profit or Loss from Business." This is where you list your business income and expenses. If you received irregular income in the past, you might refer to your previous schedule C filings to determine an average income. For example, if the prior years show $100,000, $75,000, and $80,000, you would add the totals and divide by three to arrive at an average annual income of $85,000. Miscellaneous income, such as employee incentives not reported on a form W-2, would be shown as "Other income" on the first page of your U.S. Individual Income Tax Return -- federal form 1040 -- on line 21.
You should consult with an accounting professional such as a CPA or bookkeeper to help you plan for periods of irregular income. One of the best ways to budget for irregular income is to set up an accounting system that will allow you to keep track of income and expenses. This way, you can budget for future expenses based on your expectation of irregular income.
I graduated with a degree in Finance from Cal Poly Pomona and have held an active Brokers License for over 30 years. I also owned an accounting and tax practice for ten years. I'm an expert in all matter relating to mortgages, accounting, small businesses and taxation, and investing.