Whether you receive cash tips as part of your job in the gig economy or are giving a cash gift to a relative, you need to know when and how to report that money to the IRS. There are different rules and reporting requirements depending on whether cash is income or a gift, how much money changes hands and whether you are the giver or receiver.
“It’s not just cash,” says Nicole Rosen, an enrolled agent in Wenatchee, Washington, who owns the firm Boundless Advisors. Gifts of property — such as a car — can fall under the same rules. “That can be cash in the view of the IRS,” Rosen says.
Here’s a closer look at each rule and how it might affect you:
You Don’t Have to Report Cash Gifts of up to $16,000 a Year
Cash gifts can be subject to tax rates that range from 18% to 40% depending on the size of the gift. The person making the gift must pay the tax but thanks to annual and lifetime exclusions, most people will never have to pay a gift tax.
In 2022, you could give gifts of up to $16,000 without any tax or reporting requirements.
“I don’t want anyone to fall in love with that amount,” Rosen says. “That number changes annually.”
For 2023, the annual exclusion limit increases to $17,000. The threshold is per person, meaning a couple can give a combined gift of up to $32,000 to each of their children in a single year, for instance.
“Gifting cash to family members can be a significant component of an overall estate plan,” says Scott Sturgeon, senior wealth advisor and founder of Oread Wealth Partners in Leawood, Kansas.
“Making tax-free gifts of cash or even other assets to family members while you’re living can be a great way for you to actually witness those family members benefit from those gifts.”
Some cash gifts, such as those people give to pay certain tuition or medical bills, are excluded from any tax requirement. To be eligible for this exclusion, however, you must give the gifts directly to the school or health care provider.
[READ: Smart Ways to Gift Money to Children.]
Excess Gifts Require a Tax Form
If a person’s gift exceeds the exclusion limit, they must file Form 709 to report the excess gift to the IRS. But that doesn’t mean they’ll have to pay taxes.
“It doesn’t necessarily generate a tax right away,” says Daniel Laginess, certified public accountant and president of Creative Financial Solutions in Southfield, Michigan.
That’s because in addition to the $16,000 annual exclusion, there is an $12.06 million lifetime exclusion for the 2022 tax year. “The excess amount goes against the lifetime exemption,” Laginess says.
Married couples who file their tax returns jointly may also have to file a Form 709 — even if their gifts are less than $16,000. For instance, a husband and wife could each give $16,000 to their child but they would need to report the $32,000 to the IRS on Form 709 to properly split the gift between them.
Keep in mind that cash doesn’t actually have to change hands for a gift to have tax implications.
“If you’re paying for a wedding, that does trigger the gift tax,” Laginess says as an example.
Parents who spend more than the annual exclusion amount on a wedding for a child should file a Form 709. Laginess says, however, that he has never seen the IRS come after a taxpayer for failing to report wedding expenses they paid for someone else.
The Donor Is Reponsible for Gift Reporting and Taxes, Not the Recipient
When it comes to reporting gifts and paying any taxes due, the burden falls on the person making the gift. The recipient doesn’t have to do anything.
Depending on what the recipient does with the gift, there may be future tax implications, such as paying capital gains tax on an investment. But someone accepting money — even in excess of the annual exclusion amount — doesn’t have to worry about reporting it to the IRS.
“For documentation, it’s important to keep records of all these transactions in the form of account statements and any tax filings that may go with them,” Sturgeon says.
[Read: Tax Implications of Supporting Adult Children.]
Capital Gains Tax May Apply to Gifts Accruing Value
The gift tax can apply to both cash and noncash gifts. If you receive a noncash gift, you may end up paying a capital gains tax on a portion of its value even if it falls below the gift tax exclusion.
For instance, let’s say someone gives you stock valued at $10,000, but they spent only $1,000 to buy it. When you sell those shares, your capital gains will be calculated based on the original purchase price. This amount is known as the basis. If you sell the stock for $10,000, you’ll pay capital gains tax on $9,000, which is the sale price minus the basis.
In some situations, such as the gift of a home, the recipient could be facing a significant capital gains tax if they sell the property. But if you’ve inherited a house (instead of receiving it as a gift), you can avoid this tax burden since the basis for inherited property is reset to the market value at the time of the owner’s death.
[Read: Estate Planning Tips to Keep Your Money in the Family.]
You Don’t Need to Report Payments Between Individuals
For monetary payments that aren’t gifts, you likely don’t have to worry about any tax reporting. For instance, there’s no need to tell the IRS about the money you paid to the person who mows your lawn, walks the dog or paints your spare room.
The same goes for cash you received for most items you sold privately. That is, unless you’re buying items to resell online or making regular income from your sales. Then, your activity could constitute a business. In that case, you’d need to report the money as income on a Schedule C or other business tax form.
While it’s common for people to pay one another via services such as PayPal and Venmo, a new IRS reporting requirement could cause complications. Starting with the 2022 tax year, those who receive payments of $600 or more for goods and services via third-party payment processors will receive a Form 1099-K. Previously, this form went only to those who received at least 200 payments that exceeded $20,000.
“If I don’t categorize (a payment) correctly when I send it, there is a chance (the recipient) could receive a 1099-K at the end of the year,” Rosen says. She doesn’t advise people to ignore the form either, saying: “If you have it, the IRS has it.”
In the event you receive a 1099-K for payments you received from family and friends, Rosen says you have two options: Try to see if the payment processor can correct the error or report the money on your tax return. For her clients, Rosen plans to take the latter approach should she run into this situation. She expects to add the money as other income, subtract it from Schedule 1 and then include a disclosure statement explaining why the money isn’t taxable.
Most payment services allow users to include a note when sending money. Rosen encourages people to add a message explaining what the cash is for so that if there are any questions later, recipients have documentation showing the money isn’t taxable.
Not every payment platform will be sending 1099-K forms, though. For instance, Zelle says the new rule does not apply to its service.
Report Payments of $2,400 or More Made to Household Employees
While you don’t have to report most cash payments to the IRS, the rules are different for some domestic workers, including nannies. If a person works exclusively for you and you dictate how they spend their day, the IRS would likely classify that person as a household employee.
Once you pay an employee $2,400 or more per year, you need to begin withholding Federal Insurance Contribution Act taxes for Social Security and Medicare. The cost of FICA is split between employees and employers, so you’ll need to pay half of the 15.3% tax. Plus, you may be required to pay unemployment taxes.
If you have a household employee, you might want to apply for an employer identification number from the IRS. You also need to give your worker a W-2 each year and file a Schedule H Form 1040 with your own taxes to report the income you paid. An accountant may be able to assist with this process or some tax software companies have programs for those who want to manage payroll themselves.
The rules are slightly different if you own a business. In that case, if your business pays someone to do work, such as cleaning your office, and you are not their sole client, you may need to issue a Form 1099-MISC instead.
“You’re supposed to issue a 1099 after $600 a year in earnings,” Laginess says.
You Must Claim All Income, Even if You’re Paid in Cash
In recent years, many people have embraced gig work, which enables them to work remotely and on their own schedule. Those receiving cash payments for any work, however, should be mindful of their obligation to record that income and claim it on their federal tax forms.
You must report money from freelancing, consulting or other self-employment even if you don’t get a Form 1099 from the person or company who paid you.
The IRS likely isn’t concerned with your teen’s babysitting money, but you could face penalties or audits if you’re making full-time income from gig work and fail to report it. In the event of an audit, the government will compare deposits to your bank accounts against the income you report.
Cash may seem like an untraceable way to give and receive money, but IRS regulations still apply. Whether you’re giving a gift or paying a worker, make sure you understand these crucial tax rules.
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7 Tax Rules to Know if You Give or Receive Cash originally appeared on usnews.com
Update 12/15/22: This story was published at an earlier date and has been updated with new information.
