Raleigh NC Financial Advisor: What is taxable income?

The landscape of side gigs offers a vast array of opportunities to earn some extra income each month. You can choose to drive for Uber, deliver groceries, do freelance graphic design, or officiate weddings. There are many opportunities for self-employment.

However, as tax season approaches, things can become perplexing, particularly if you've earned income from multiple sources. The question of what income is truly taxable may leave you uncertain. Knowing the difference between taxable and non-taxable income is important for managing taxes and understanding your finances.

Taxable Income

Your Salary 

This type of income is familiar to most people. If you receive a regular paycheck from an employer, it is essential to report this income to the IRS. Your salary also encompasses any bonuses and commissions you receive.

Bonuses or cash awards given by employers usually fall under the category of taxable income and must be reported as wages. However, certain circumstances may allow for bonuses to be excluded from your income, depending on how your employer awards them.

Tips

People in service jobs, such as waitstaff and bartenders, are required to report any tips they receive to the IRS. These tips are considered part of their income. This reporting obligation extends to both cash tips and tips received through other means.

It is crucial to report all income, even if it is not deposited into a bank account. Not reporting income correctly can cause problems with the IRS and state authorities, as they can find unreported income. Reporting all earnings diligently ensures tax compliance and reduces the risk of attracting unwanted attention from tax authorities.

Employees should record their tips daily. They should inform their employer about the tips.

Additionally, they should accurately report all tips on their tax return. This should be done in accordance with the guidelines provided by the IRS. Following these steps ensures proper compliance with tax regulations and helps in accurately reflecting tip income for tax purposes.

Freelance Income

Treating freelance income on par with your regular salary is crucial. You must report your freelance income, even if the company you worked for doesn't give you a 1099-MISC form.

Freelancers bear the responsibility of paying both regular income tax and self-employment tax. The self-employment tax currently stands at 15.3%, which comprises 12.4% for Social Security and 2.9% for Medicare. These taxes correspond to the taxes typically paid by businesses but are usually withheld automatically from employees' paychecks.

All income must be reported, irrespective of whether you receive a formal reporting document or not. Complying with reporting requirements ensures proper taxation and adherence to tax regulations for freelance income.

Worldwide Income

Suppose you are a U.S. resident earning income from a foreign-based company. Even if you do not receive a W-2 or 1099 form from the overseas company, it is imperative to inform the IRS about this income. Reporting Worldwide Income to the IRS involves filling out Form 2555.

Worldwide Income encompasses various earnings, including wages, tips, interest, dividends, capital gains, pensions, rents, and royalties—both earned and unearned.

The IRS website clarifies that as a U.S. citizen or resident alien, you must report income from all sources, both within and outside the U.S. This ensures full compliance with tax regulations and acknowledgment of income earned globally.

Bartering

While bartering may not appear as tangible money, it holds value in the eyes of the IRS. If you exchange a product or service for something of worth, it is considered income. The reporting guidelines for bartering income vary depending on the nature of the exchange. If you frequently engage in bartering, it is advisable to visit the IRS's Bartering Income page for comprehensive information. 

A clear example of taxable bartering involves a plumber trading plumbing services for the dental services of a dentist. In such cases, both parties are required to report the value of the services rendered as taxable income. Being aware of the tax implications of bartering helps ensure compliance and accurate reporting of income for both parties involved.

Gambling Winnings

All gambling winnings are subject to full taxation, and it is essential to report them on your tax return, as stated by the IRS.

The category of gambling income encompasses various sources such as lottery winnings, raffle proceeds, horse race earnings, and casino wins. It includes money and the value of non-cash rewards, like cars and trips, according to the IRS website.

You can deduct your gambling losses from your taxes. This can help lower the amount you owe and provide some financial relief.

Jury Duty Pay

If you get paid for being on a jury, you have to tell the IRS about the money you earned. If you decide to hand over your jury duty pay to your employer in exchange for continuing to receive your salary, you can claim that amount as a deduction. To determine if your jury duty payment is subject to taxes, the IRS provides a brief quiz on its website. This quiz assists in comprehending the tax implications of your earnings.

Hobby Income

If you make money from your hobby, like buying and selling antiques, you need to tell the IRS about it. Unfortunately, the deductions for hobby expenses are no longer applicable in the process. The same rule applies to selling or flipping items online.

The crucial factor that distinguishes a business from a hobby is the intent to make a profit. The IRS provides a helpful list of factors to assess whether your hobby qualifies as a business. Regardless of the classification, reporting your earnings remains a requirement in both cases.

Cancelled Debts

When creditors forgive a portion or the entirety of your debt, the IRS treats this as taxable income. However, certain exceptions exist, such as debt canceled as a gift or inheritance, and student loan debt forgiven under specific programs.

For a comprehensive list of exceptions, which can be quite extensive, you can refer to the IRS website. It's essential to understand that debt forgiveness is a complex matter. Hence, we strongly advise seeking guidance from a tax expert who can provide personalized advice based on your unique situation.

Prizes and Awards 

The IRS considers prizes and awards as taxable income. This includes winnings from lucky number drawings, quiz shows, beauty contests, and other events. It is mandatory to include these winnings in your income for tax reporting purposes. If you win $50 in a contest, you must tell the IRS about it.

This rule also extends to esteemed awards achieved through significant accomplishments, such as Pulitzer, Nobel, or similar prizes. Nevertheless, there are specific requirements listed by the IRS that may exempt you from reporting this type of income. Understanding these criteria is vital in ensuring accurate tax compliance.

Bottom Line

If you want to know what the IRS counts as taxable income, check the IRS website for a complete list. It is also a good idea to talk to a tax expert or financial advisor to know what income is taxable and what is not.

Sources:

https://www.thepennyhoarder.com/taxes/irs-taxable-income/

Disclosures:

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.