Having multiple odd jobs to help ends meet makes things easier, except at tax time. Because odd jobs that pay cash leave no paper trail of the amount you earned, you're responsible for keeping accurate records of all income received and reporting it to the IRS. How you go about filing taxes on cash jobs varies depending on whether you are considered an employee or a self-employed independent contractor. However, it’s a good idea to keep an accurate accounting of your earnings for your personal records either way.
Am I an Independent Contractor or an Employee?
Sometimes, the lines between independent contractors and employees can blur a bit. Employees and independent contractors often perform the same tasks or duties, and may even work side-by-side. But, for the IRS, the distinction between the two is rather clear-cut. As far as the IRS is concerned, it doesn’t matter if you are being paid for yard work, babysitting, or you own your own business, you will fall into one of these two categories.
The main difference between an employee and an independent contractor comes down to the level of control a payer has over a worker. The IRS breaks down this control into three areas: behavioral, financial and type of relationship, on a 20 criteria right-to-control test. For example, some factors that determine if you’re self-employed or not include the level of control you have regarding the performance of your work duties, whether or not taxes are withheld from your paycheck, and the continuing work relationship between you and the person paying you.
A general rule of thumb is, if you receive a W-2 at the end of the year, then you’re probably considered an employee. If you receive a 1099-MISC – or nothing at all because you were paid in cash – you’re likely regarded as a non-employee for tax purposes.
When Do I File a Schedule C?
Employees receive a W-2 from their employers, stating the amount of their income and tax withheld. But when you're paid with cash instead of via a paycheck, you may not receive a W-2. However, this does not mean your employer isn’t responsible for reporting your income and for withholding appropriate FICA taxes from your paycheck. Even without a W-2, you are still required to report your cash income to the IRS from all sources. To do this, list this cash income from all W-2s you've received on Form 1040, line 7, under wages.
Schedule C or Schedule C-EZ are used by independent contractors and self-employed wage earners who, for tax purposes, are not considered employees. Like employees paid cash and who receive W-2s, the person paying you may not send you a 1099-MISC for your cash earnings as an independent contractor. Nevertheless, you, too, are required to keep accurate records of any monies received and report this cash income to the IRS. However, as an independent contractor, you can also deduct any work-related expenses that you incur during the course of doing business.
At tax time, when you need to add up your income totals from multiple jobs, if this income is from similar types of work, you may complete only one Schedule C. If the sources of income are from totally different streams – for example, you had cash income from writing but also from child care – then you should complete a Schedule C form for each. After you determine if you need to file one or multiple Schedule C forms, report your cash income on Part I.
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What about Social Security and Medicare?
Independent contractors are required to pay their own Self-Employed Contributions Act taxes. These are the self-employed version of the Federal Insurance Contributions Act, or FICA, taxes that must be deducted from an employee's pay. SECA taxes cover both Social Security and Medicare, and are mandatory. Because whomever paying you does not withhold SECA taxes, you are responsible for taking care of these taxes yourself as an independent contractor. SECA taxes are calculated on Schedule SE of Form 1040, if you net more than $400 in a year. While you do have to pay your own SECA taxes, you are able to deduct half of this self-employment tax from your income on Form 1040, line 27.
Employees that do not receive a W-2 should request a copy from their employers so they can be certain FICA taxes were withheld. Even though you are being paid with cash for your work, your employer must withhold these mandatory deductions from your payroll on your behalf. If you feel your employer is not withholding your FICA tax contributions, make it a priority to contact the IRS to report the situation.
- IRS: Independent Contractor (Self-Employed) or Employee?
- Oregon.gov: IRS 20 Factor Test – Independent Contractor or Employee?
- H & R Block: How to Handle Cash Payments for a Summer Job
- AARP: Is Your Employer Paying FICA Taxes?
- Social Security: What are FICA and SECA taxes?
- GoSmallBiz: Consultant’s Corner – Tax Returns on Multiple Businesses
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