Running a business involves so much more than just offering great products and customer service. One of the biggest responsibilities you have as a business owner is to keep your financials in check. This is particularly true of anything to do with your taxes. Unfortunately, taxes can be incredibly confusing for business owners. One of the most confusing aspects for entrepreneurs and small business owners is understanding what business income is taxable and what is not. You will hear plenty of rumors, outdated advice, incorrect data, and internet responses that are not true. It’s easy to fall into the trap of believing myths that might get you into trouble.
The best way to protect yourself is to work with a qualified CPA who can help you with your bookkeeping and business income tracking. In this guide, we will bust some of the most common myths about business income, and clarify what is really taxable. We hope this guide helps you be more compliant, informed, and confident about your taxes.
Myth #1: “If I’m Paid in Cash, It’s Not Taxable”
The truth is that all income is taxable, even when it is paid in cash. There are many people who would tell you that you don’t need to document cash receipts. This is not true. Whether the customer hands you cash for a haircut, a product, or some other service, that money is still considered business income. You must report it. The IRS does not distinguish between payment types like cash, checks, digital transfers, or even bartering. They all count as income.
It is your responsibility as a business owner to keep detailed records of all transactions, including your cash transactions. You can use a point-of-sale system, but there are also other methods you can use to stay organized and ensure accurate reporting. Some business owners keep it as simple as making receipts for every transaction. Maybe you want to use a digital spreadsheet. Come up with a solution that helps track and stay on top of this income to keep your data accurate.
Myth #2: “It’s Just a Side Hustle—I Don’t Have to Report It”
Are you an individual who has a small job to make extra money on the side? Maybe you’re a freelancer who charges your clients based on what you do for them. Perhaps you mow lawns for extra money. This being a side hustle rather than your full-time job does not excuse you from claiming the income. The fact is, the IRS requires you to report all income, regardless of how small or part-time that income is.
It doesn’t matter if you’re just selling a few things on Etsy here and there or whether you offer freelance services on evenings and weekends. All income is taxable. Unfortunately, the IRS does not give us a side hustle exemption. If you earn money, no matter the reason, it should be reported. That being said, there are certain thresholds that provide minimal allowances.
Myth #3: “Gifts and Personal Loans Aren’t Taxable”
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Don’t skip this one just because we refer to gifts and personal loans. We are referring to these things on a business basis. There are gifts that may be non-taxable to a recipient, but business income that has been disguised as a gift is still taxable. If someone gives you money as a genuine gift with no expectation of service or product in return, that may not be taxable. That’s a personal gift. However, if a client or customer gives you a gift in exchange for a favor or a product, this is business income.
The distinguishing factor here is whether that gift or loan is given to you for business purposes. Is it for a product or service, or is it for your business specifically? These items are both considered income if they have anything to do with business practices.
Myth #4: “If I Don’t Get a 1099, I Don’t Have to Report It”
Technically, certain clients and platforms have a responsibility to issue you a 1099 for income. However, it is always possible that someone will fail to issue one. Understand that even when you don’t receive a 1099 for work completed, you still have to claim the income. You don’t get off the hook just because you never got a form.
You can reach out and request a form, but you are required to file this income no matter what. We recommend that you keep your own clear records instead of relying on everyone else to correctly report your income. The best practice is to ensure your bookkeeping is the primary source of truth so you can report correctly.
Myth #5: “Bartered Goods and Services Aren’t Taxable”
A very common mistake in the business world is that trading means you don’t have to document it. Bartering transactions are still considered taxable according to the IRS. That means if you trade a photography session for someone to provide you with web design services, both of you are expected to report the fair market value of the goods or service provided as income. You may not exchange any money, but the value of what you did exchange still counts as business income.
Myth #6: “Reimbursed Expenses Aren’t Income”
This one is a bit more challenging. The truth is that it depends. When a client reimburses you for things like travel, meals, or materials and the reimbursement is not included as part of your income, it is generally not taxable. However, if you charge a flat fee to your client that includes these costs in it, and you don’t itemize those reimbursements, then the total amount could be considered income. The best practice here is to keep expense records separate and clear. Always keep receipts and documentation. Work with an accountant to determine which reimbursements are reportable and the best way to track them.
Get Business Income Support with Katherine M Johnson, CPA
Understanding what counts as taxable business income can be tricky. We get it. There is a lot of misinformation out there, and the rules can be complex. Stay informed and be proactive to help avoid costly mistakes. Hiring a CPA to help may just be your best solution. At Katherine M Johnson, CPA, we are happy to help with tracking income and expenses. Schedule with us today to get started.
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