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A common misconception among independent contractors revolves around reporting income and 1099-MISC forms. Although it is true that your client doesn’t have to issue a 1099-MISC unless that client pays you more than $600, you still have to report those earnings on your income tax return. The IRS treats all income as taxable, and every cent you make needs to be accounted for when tax time comes around. You can be charged penalties and interest on income you didn't report, whether your reason was negligence or fraud.
Whether you have wages, salary, side job income, prize winnings or gambling proceeds, the IRS wants to know about it on your tax return. Taxpayers must report all income from any sources in any country to the IRS unless specifically exempt under the U.S. tax code. You and the IRS receive a form 1099-MISC for any earnings exceeding $600 for the tax year. It is your responsibility to document any earnings of less than this amount, on your tax return.
Never take the attitude that if the IRS doesn’t know about it, then it can’t hurt. During an audit, the IRS goes through your bank statements. It questions all findings of unreported income. You might receive Notice CP-2000 for underreported income. This notice adjusts your tax return to reflect the changes by adding the income into your total income, adjusting your credits and your total tax bill.
Documenting Your Income
Every cent of earned income through side jobs, gambling, prize money, and so forth must be documented. You may use your bank statements or check stubs to document the income. The IRS does not request this documentation when you file your taxes at the beginning of the year, but you need to keep it in case you are audited.
For the self-employed and independent contractors, assembling all the paperwork for your unreported income is a hassle, to say the least. The IRS offers extensions for taxpayers who think they will miss the April 15 filing deadline. This six-month extension gives you enough time to track down every cent you earned with documentation, so you can rest assured you are covered when you get your tax bill or refund.
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