Whether you receive a 1099-MISC or not, if you made the money from cash sources
(i.e. cash, check, credit card, or trade) you are
to report it on your tax return.
Performers can receive their pay as either "Employees" (and receive a W-2) or as "Independent Contractors" for which they may, or may not, receive a "1099-MISC." Although receiving your income without taxes having been taken out may seem wonderful at the time, there are numerous considerations that you should be aware of before you go out and spend that money without planning for the tax ramifications.
Let's address one huge problem up front, the "Wives Tale" about 1099's and other aspects of cash income.
If you work for a person or a company and earn $600 or more paid to you in cash (again that means paid to you by cash, check, trade, credit card payment—just no taxes taken out) within a year they are required by law to send you a 1099-MISC. You are required to fill out a W-9 (an IRS form asking for your name, address, social security number). If they ask you to fill one out, don’t try to back out of it.
Just because you may not receive a 1099, or perhaps you didn’t make enough to receive one, doesn’t mean you don’t have to report the income. If you made money of any amount you have a responsibility to report it on your tax return. Don’t assume that just because you didn’t receive a 1099 the employer didn’t send one to the IRS. They may have the wrong address for you, or your roommate threw it away, whatever.
If you made less than $600 during the year that doesn’t mean the payer can’t send out a 1099. If they have the computer fired up and access to your name, social security number and your address, why wouldn’t they? After all, if they paid you any money sending you a 1099-MISC backs up their own tax records. We’ve seen a 1099-MISC for as little as $50.
All too often the money IS reported to the IRS, but for one reason or another you simply didn't get your copy of the 1099 and so you think you got off the hook. Then, a year or so later, the IRS computer sends you a letter asking why the money wasn't included on your tax return and to send in a check for the missing taxes and perhaps additional penalties.
What could be worse is the possible suspicion someone at the IRS could develop about how this missing income might mean there is additional missing income. That could get you called in for an audit.
Self Employed Income
In the not too distant past most of our payment for performing was through W-2s as employees but things are changing as non-union work is becoming more available and so, despite the opinion of the IRS,:
"The majority of entertainers and technicians are employees and will receive a Form W-2 with Federal income tax and FICA tax withheld,"
The truth is that for modeling or print work, independent films (non union), theatre (again non-union), personal appearances and many other forms of performance related work; we are often paid in cash. Keep in mind that the term cash means getting paid in actual cash or by check. We are referring to payment of any kind with no taxes being withheld.
To understand the tax problems you may face with cash payments requires a long explanation but essentially you need to know that (in general) this income requires you to pay both Federal Taxes and "Self Employment" taxes.
Self Employment Tax = Approximately 15.3% of your Net Profit
Self Employment Taxes are the equivalent of Social Security taxes and Medicare withholding (when you are paid as an employee on a W-2). The key difference is that your employer contributes half of the total amount which must be paid in on your behalf. When you are self-employed you are responsible for the entire amount as you are considered both the Employer and the Employee. You are taxed only on the NET PROFIT you earn in this business.
NET PROFIT = Your Gross income minus the costs of acquiring and performing the work.
In addition you must pay Federal Income taxes on the Net Profit generated from your cash business. For most performers this amount is again approximately 15% (although depending on your other sources of income—including your spouse—it could be as high as 35%).
Using just 15% for Federal Income taxes though, you could owe close to 30% (or more) in taxes on the Net Profit you generate from this cash income.
The most serious issue for you earning your money in this way is that you have had nothing withheld throughout the year. Unless you have experience in getting paid in this fashion and have taken it upon yourself to make quarterly payments to the IRS (and possibly the state) and/or put a significant amount away in the bank with the understanding these taxes will come due.
When large amounts of money are paid to you this way it seems at first to be a blessing, but all too soon becomes a curse because you find yourself with an overwhelming tax bill if you don’t take into account the amount of money you will probably owe come tax time.
If you had Taxable income of $20,000, you would owe a total of $2,579 in Federal income taxes.
In addition, you owe another 15% (approximately) in Self Employment Tax on the Profit you earned in 1099 income. If the profit you generated for your 1099 work happened to be that same amount of $20,000 that would have generated a Self-Employment tax of $2457. You would therefore owe a total of $5,036 in total taxes, essentially created from the cash income alone.
That’s more than 25% of the $20,000 you brought in and we haven’t included state taxes yet.
Including state tax on just this amount of money in California, that would be another $514. That would be a total amount of $5,550 you owed in taxes.
Simply put, a good rule of thumb is that for every $1,000 you make in self-employment income, you owe 30% or $300. If you know you are in a higher income tax bracket due to your regular income then adjust the withholding accordingly.
This is money that should be put aside and/or paid into the IRS quarterly to make sure that you aren't stuck with a huge tax bill the following year that you can't pay.
Bear in mind, the ditch is hard to crawl out of once it is dug. If you find yourself in this position you not only have to make payments on last year’s taxes in the following year, but if you continue earning your money in the same manner you also have to pay additional quarterly taxes quarterly. Somewhere along the line you will need to find money to live on.
What seemed so wonderful when you first earned the money turns into a nightmare all too soon. Beware.
Here are some additional points that will assist you in understanding this situation:
When you are hired as an employee, the employer is required to withhold taxes for your Federal taxes and 7.5% of your gross earnings (up to a limit) for your Social Security obligation.
What most people don't know is that the employer is also required to MATCH the 7.5% they are withholding from you with another 7.5%. That's why when you are self employed, you have to pay the full 15% as you are both the employer AND the employee.
So you know, there are other costs involved for the employer. For example, when you are hired under a S.A.G./AFTRA contract, the producer has to pay another 16.3% of your gross salary to the union for Health and Pension. In just these two added costs (16.3% plus the 7.5% Social Security payment) they owe another 23.8%.
Simply put, for every $100 you are to receive in salary, they actually have to pay out more than $124 in payroll.
That explains why the person you might be working for is so anxious to have you working “under the table” as an independent contractor. They would much rather save their money, and in the process force you to pay the additional 7.5% in self-employment taxes out of your pocket (and lose the other benefits you might be entitled to as an employee) than pay the fair share they would normally owe for your services.