While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report "outside," or miscellaneous income.
With a tough economy and raises few and far between, more people are doing work on the side to earn extra money, so the reporting requirements affect a lot more taxpayers than before. In addition to income from side jobs, the Internal Revenue Service (IRS) also requires you to report:
- barter exchanges of goods or services,
- awards, prizes, contest winnings and
- gambling proceeds
Taxpayers must report all income from any source and any country unless it is specifically exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands.
You report this income using Form 1099-MISC, which you should receive from the person paying you. It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. However, the IRS says there is no minimum amount that a taxpayer may exclude from gross income. If you earn it, you must report it.
All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040.
Use Form 1040, Schedule C, Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship) to report income and expenses. Taxpayers will also need to prepare Form 1040 Schedule SE for self-employment taxes if the net profit exceeds $400 for a year. Do not report this income on Form 1040 Line 21 as Other Income.
Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer.
Fees received for babysitting, housecleaning and lawn cutting are all examples of taxable income, even if each client paid less than $600 for the year. Someone who repairs computers in his or her spare time needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.
Bartering is an exchange of property or services and oftentimes this slips through the tax-reporting cracks. But the IRS says even bartering is subject to taxation.
The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. Income from bartering is taxable in the year in which the taxpayer received the goods or services.
In most places, gambling is against the law. Even so, gambling winnings are fully taxable and must be reported on Form 1040.
Gambling income includes, among other things, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings as well as the fair market value of prizes such as cars and trips.
Even if a W-2G is not issued, all gambling winnings must be reported as taxable income regardless of whether any portion is subject to withholding. In addition, taxpayers may be required to pay an estimated tax on the gambling winnings.
Losses may be deducted only if the taxpayer itemizes deductions and only if he or she also has gambling winnings. The losses deducted may not be more than the gambling income reported on the return.
Prizes and awards
In most cases the cash value of prizes or awards won in a drawing, quiz show program, beauty contest, or other event, must be included on the tax return as taxable income. Taxpayers must also report the fair market value of merchandise or products won as a prize or award, as taxable income. For example, both a $500 cash prize and the fair market value of a new range won in a baking contest must be reported as other income on Form 1040, Line 21.
For more information about miscellaneous income reporting requirements, check out IRS Publication 525 - Taxable and Non-Taxable Income.