How to File Income Taxes if I’m Paid Under the Table
Receiving payment under the table might appear to be a win-win arrangement. After all, if you don't have a record of your income, you're not obligated to pay taxes on it, and neither is your employer, right? The problem is that someone is losing in this situation: the IRS. And when the IRS loses, they get furious. In addition, audit, and penalties.
So, no, getting paid under the table won't let you avoid paying income taxes and keep you out of criminal charges. It really makes it more difficult to pay them. If you find yourself in this situation, here's how to make things as simple for yourself as possible while still ensuring you're not in trouble with the IRS.
Let’s dive in to learn more about working under the table, and how to file taxes if paid under the table.
The Difference Between Being Paid in Cash and Being Paid Under the Table
Firstly, it's important to note that, receiving cash is not unlawful; but, receiving cash under the table is.
What’s the difference? Getting paid in cash clearly implies receiving tangible dollar banknotes. However, this is still lawful if your company is following employment regulations and correctly documenting your payments for tax purposes. This means that when they pay you, they should maintain a record of it and, depending on the sort of employee you are withhold taxes and pay employer taxes, like Social Security and Medicare.
Getting paid under the table means you're getting paid in cash and your firm isn't keeping track of it, most likely saving money and time by not having to do all of those things.
When you start a new or part-time job and find you'll be paid in cash, ask your boss if they'll keep track of your earnings and deduct taxes from your pay. This can help you to determine whether they're exceeding the standard or not and will inform your planning to file a tax return as per the tax laws.
Is It Necessary to Report Income From Under the Table Jobs?
The short answer is yes. Depending on the source of your under-the-table income, you will be required to file Form 1040. You may also need to file Form 4137 for reporting cash income from odd jobs, such as tips. If you're confused about which form to use and how to file taxes if paid under the table, ask a tax professional or refer to the IRS website for more information.
Where Do I Report My Cash Income?
The manner in which you disclose these payments is determined by whether you are an employee or an independent contractor.
If you are an employee, you must record your cash income from odd jobs on Form 1040, line 7, as wages. The IRS requires all business owners to provide a Form W-2 to each employee. However, as you are paid under the table, it is likely that your employer will not provide you with a Form W-2. You should keep track of how much you were paid during the year.
If you work as an independent contractor, you must report your earnings on Schedule C or Schedule C-EZ. You will also be allowed to deduct job-related expenses from this income.
For example: if you conducted landscaping work and were self-employed, you can claim supplies for your automobile usage on Schedule C. Your employer is only required to give you a Form 1099-MISC disclosing your income if you were paid more than $600 during the fiscal year. To be safe, keep detailed records of all payments and expenses in case you don't get Form 1099-MISC.
Keep Careful Track of Any Cash Income During the Year
Whatever sort of employee you are, keep a meticulous account of any cash payments you get during the year. This is especially critical if you suspect your employer is not tracking correctly or is attempting to pay you under the table.
This might be as basic as maintaining a spreadsheet to track cash revenue whenever it comes in. We recommend keeping a record of the date, who paid you, and the amount.
If you are an employee who earns a large portion of your cash income from tips, your employer should compel you to track and disclose it to them, as the IRS does. Check to see whether your workplace has an electronic tip reporting system that you may use at the end of each shift. If not, ask your manager about their approach to monthly reporting. If they don't do anything, you can track it yourself. Yes, it's a hassle, but it's far less painful than being audited.
Request a W-2 or a 1099-NEC From Your Employer
When it comes to the tax time, you should expect to receive a W-2 from your employer if you're considered an employee, or a 1099-NEC if you're considered an independent contractor and they've paid you more than $600 over the course of the year if you're paid through cash, check, or bank transfer.
You should get these forms for the following tax year by January 31. If you did not receive the form, inform your employer about it and gently remind them of the penalty for not properly monitoring and filing it.
File Your Cash Income as Miscellaneous Income
Even if your company refuses to properly disclose these payments, you should declare that income yourself so that if they ever get in trouble, you can prove you paid your taxes fairly and squarely.
Fortunately, you've made it simple for yourself by keeping track of your cash earnings throughout the year. Add it all together and report it as miscellaneous income on Form 1040, Schedule C.
The Bottom Line
Working under the table to make ends meet makes life simpler, until during tax season. Because cash jobs leave no paper trail of your earnings, you are responsible for keeping accurate records of your earnings and filing your tax returns to the IRS. As each side gig or odd job is unique, contact a licensed tax professional before filing your income taxes.