The Internal Revenue Service (IRS) has created a very precise, automated tax system where the taxes that most people have had withheld should be recorded on their pay stubs. But, what if I am paid in cash? How do I file taxes when I am paid cash?
Cash Based Business
There are many cash-based businesses, including gas stations, laundromats, restaurants and vending machine companies. The products and services that they provide are essential for a healthy economy. Cash is easy to handle and can be much cheaper than installing credit card machines.
Businesses that have been burned by handling bounced cheques will prefer to handle cash. In fact, some businesses will still give you a discount if you pay cash. Cash flow can be a very positive benefit of a business.
Businesses and their employees might both be paid in cash. Waiters, waitresses, golf caddies and parking lot attendants will receive a relatively significant part of their wages in tips. Of course, that is part and parcel of the service industry.
Customers can reward good service with cash tips. It is a well-established tradition that won’t go away. Unfortunately, it can be difficult to keep track of all of these coins and bills.
If the IRS had its way, all financial transactions would be digital. They are encouraging more individuals to accept electronic direct deposit. But, the real world still loves cold, hard cash.
Even with the automated tax-collecting processes, there are still vital cash-based businesses. And, that is why there are many different tax forms to choose from. The 1040 form might not be enough for those paid in cash.
For most workers, they can simply plug in taxes withheld on a short 1040 form, calculate their taxes and be done with it. Cash-based businesses do not enjoy that luxury. Cash cannot be withheld because it is usually not tracked.
That is why you might need to file the 1099-MISC form, which can be used for tips, interest or dividends. This provides you with a space to break down your cash payments, in more detail.
You must still calculate how much you make in cash tips for your federal and state income taxes. If you look closely at the 1040 form, you will see that the place for income includes tips. That is where you can use the 1099-MISC form.
Calculate your tips on the 1099-MISC form, add them to your other income and total them on your 1040 form. If you want more taxes withheld to account for cash tips, you can make that arrangement.
Unfortunately, statistics show that members of cash-based businesses will have a higher chance of being audited. The IRS believes there is a higher chance of these workers trying to hide their income.