How to File Taxes When Paid Cash

When you make cash instead of W-2 earnings, you need to pay self-employment taxes on that money, which covers your Social Security and Medicare taxes. Your federal and state tax liability is calculated when you file your tax returns. Before you file your taxes, you must complete specific forms from the Internal Revenue Service (IRS) to calculate your taxable income and portion of self-employment tax.

Schedule C Profit and Loss from Business

Schedule C Profit and Loss from Business is the first form you need to complete when paid cash for work performed. The form is used to report cash earnings and any expenses you may have had pertaining to the work that you did. For instance, a handyman may have expenses for tools of the trade and mileage to the job site. All cash income is reported on the form and all verifiable expenses. You must have documentation such as receipts for purchases or a ledge to verify mileage. After completing the form, you need to calculate your self-employment tax.

Schedule SE Self-Employment Tax

Schedule SE Self-Employment Tax is used to determine how much you owe for Social Security and Medicare taxes if you have more than $400 in taxable income. After completing Schedule C, use the total income after expenses are deducted to calculate the self-employment tax.

Federal Tax Return

Your federal tax liability is calculated after completing Schedule C and Schedule SE. After completing the federal 1040 form, you will have a balance due for self-employment tax and any federal tax you owe. There are credits and deductions on the 1040 form that could lower the amount of the self-employment tax or federal tax you owe if any apply. For instance, earned income credit is a refundable credit that could reduce the amount you owe for self-employment tax and federal tax.

State Tax Return

State tax returns are calculated using the adjusted gross income from the federal 1040 form. After completing your state return, you may or may not owe the state taxing authority. You don’t have any additional forms to file for being paid cash, unless your specific state requires more information than just your federal adjusted gross income.

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