Our jobs bring us different incomes and, therefore, different personal income tax requirements. That being said, the majority of Americans do have to pay taxes on the money they make. If you are a single person or are married and filing separately from your spouse, to be required to file a federal tax return, you will need to have gross income of more than $12,000 in 2018. However, different rules may apply if you are married, file as Head of Household, are self-employed or can be claimed as a dependent of another taxpayer.
Once you understand where your income stands in relation to these minimums, you’ll want to know the tax protocol that applies when you earn no income, are paid in cash, or are paid under the table.
How Much Do You Need to Earn Before Paying Tax?
You work hard for what you earn. Therefore, you probably don’t want to pay taxes unnecessarily, right? You can avoid that scenario by making sure you understand the income tax minimums. First off, for 2018, if you are a single person or a married person filing separately from your spouse, you aren’t required to file a federal tax return unless you make more than $12,000. That minimum threshold rises to $18,000 if you file as Head of Household.
If you are not single, then the amounts are different. If you are married and filing jointly, you will be required to file a federal tax return if your combined gross income is more than $24,000. If these numbers look familiar, it’s because they’re also the standard deduction amounts for 2018. However, whatever your filing status, if your employer withholds federal income taxes from your wages, you may want to file a tax return solely to claim a refund of any federal taxes withheld.
If you are self-employed or can be claimed as a dependent by another taxpayer, your filing threshold is much lower. Dependents are required to file a return if their income is greater than $1,050. Self-employed people have to file a return if their net earnings from self-employment were $400 or more.
Can You Get a Tax Refund If You Have No Income?
You may think that tax refunds go only to those who report income on their tax return. This is not always the case. You can get a tax refund without income based on certain deductions or credits you may be able to claim. One example is a Net Operating Loss (NOL) carryforward stemming from a business loss. NOL carryforwards allow taxpayers to carry an unused tax loss forward to upcoming years, using it to offset profits in those years.
Another example is capital loss carryforwards. If you sell an investment at a loss, you can use that loss to offset gains from other investment sales. If your capital losses are greater than your capital gains, you can use up to $3,000 of that loss to offset “ordinary income” from your salary and wages or income from self-employment. Any unused losses are carried forward to later years.
How Do You File Taxes If You Get Paid in Cash?
You may get paid in cash for a variety of services. These can be anything from tutoring, gardening, and snow removal, to building websites or babysitting. Regardless of what your cash-based income is, filing taxes is probably easier than you thought.
To file your cash-based income taxes, you follow the same procedure as you normally would for other income types. To file your tax return, you will want to request a Form 1099-MISC from your employer, if you don’t already receive a W-2 form from them. (The W-2 reports income earned as an employee; the 1099 is for independent contractor, or freelance, income and other specified payments, such as rents or prizes.)
Even if you don’t receive a 1099-MISC, you are still required to report the income. If you receive cash payments as part of a business, you’ll report the amount received on Schedule C attached to your Form 1040. If you’re not in a trade or business, report the cash received on Line 21 of Schedule 1 attached to Form 1040.
Is a Hobby Income Taxable?
You become a business owner because you want to make a profit. In contrast, those who make money from a hobby or leisure activity don’t usually share this same motive. Their pastime is recreational more than anything else. So, you may be wondering if you’re taxed on your hobby income at all.
The answer is yes. However, the difference between a hobby and a business depends on how much time you spend on it and whether you generate a profit.
The IRS has nine key considerations to take into account when determining if you are a hobbyist or a business. These considerations include:
- Do you operate in a businesslike way and keep accurate books and records?
- Does the time and effort you put into the activity indicate that you intend to make a profit?
- Do you depend on the income for your livelihood?
- Are your losses due to circumstances beyond your control or are they a normal part of the startup phase?
- Do you change your methods of operation to improve profitability?
- Do you or an advisor have the knowledge needed to carry on the activity as a successful business?
- Have you succeeded in making a profit in similar activities in the past?
- Does the activity make a profit in some years, and how much does it make?
- Do you expect to make a future profit from the appreciation of the assets used in the activity?
If you review the list above and determine your activity does, in fact, qualify as a business, you’ll report income and expenses on Schedule C. If your activity is actually a hobby, you’ll report the income on Line 21 of Schedule 1. Unfortunately, since the Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions, you’ll get no tax benefit from your hobby expenses.
Is It Against the Law to Get Paid Under the Table?
We’ve all heard of someone getting paid “under the table.” Maybe you’ve known a friend who’s received a payment like this, or you have yourself. Regardless, it’s something you’re going to want to rethink immediately.
Getting paid under the table may be against the law. If you’re working as a freelancer, it’s not generally as problematic because the employer isn’t required to withhold taxes on your income anyway. But businesses that pay employees under the table can face criminal and civil penalties.
In addition to freelancers, common jobs that sometimes pay under the table are:
- Car sales
- Pet sitting
- Tree trimming
The penalty for getting paid under the table and not reporting it can be more severe than just paying what you owe. Think carefully before you accept any payment this way.
Paying your annual income taxes can be a tricky business. For a smooth tax season, you will want to make sure you know how much you have to earn to file a tax return, how to file taxes when you’re paid in cash, and whether your income comes from a hobby or a business. You will also want to proceed with caution when considering an under-the-table payment offer. The more you know, you more likely you are to be compliant with changing U.S. tax laws.