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 if you’re the giver or receiver.
“It’s not just cash,” says Nicole Rosen, an IRS enrolled agent based in Wenatchee, Washington. Gifts of property — such as a car — can fall under the same rules. “That can be cash in the view of the IRS,” she 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 $18,000 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 is responsible for reporting the gift to the IRS and paying any tax due but thanks to annual and lifetime exclusions, most people will never have to pay a gift tax.
In 2024, you can give gifts of up to $18,000 to as many people as you want without any tax or reporting requirements.
“That number changes annually,” Rosen says.
Since 2021, the annual exclusion limit has increased $1,000 each year, but future tax laws could change that. For now, the threshold is per person, meaning a couple can give a combined gift of up to $36,000 to each of their children in 2024, 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,” he adds.
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.
[Related:9 Questions to Ask Before Paying Any Medical Bill]
Excess Gifts Require a Tax Form
If a person’s gift exceeds the annual exclusion limit, they must file Form 709 with 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, CPA and president of Creative Financial Solutions in Southfield, Michigan.
That’s because in addition to the $18,000 annual exclusion, there is a $13.16 million lifetime exclusion, per person, for gift and estate taxes as of 2024.
“The excess amount goes against the lifetime exemption,” Laginess says. That means if you make a gift larger than $18,000 to at least one person, the excess will be subtracted from your lifetime exclusion.
Married couples who file their tax returns jointly may also have to file a Form 709 — even if their gifts are less than $18,000. For instance, a husband and wife could each give $18,000 to their child but they would need to report the $36,000 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.
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 Responsible 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.
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.
[Related:Controversial Capital Gains Tax Upheld]
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.
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.
[See: Best Buy and Sell Apps for Used Stuff.]
While it’s common for people to pay one another via services like PayPal and Venmo, an upcoming IRS reporting requirement could cause complications. For several years, the IRS has announced plans to require third-party processors to send Form 1099-K to anyone receiving payments of $600 or more for goods and services. Previously, this form went only to those who received at least 200 payments that exceeded $20,000.
In response to concerns from taxpayers and tax professionals, the government has delayed implementation of this requirement for several years. It appears the rule will finally be put into effect in 2024, but with a modification: Only those receiving total payments of $5,000 or more will receive a Form 1099-K.
In the event you receive a 1099-K for money 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 $2,700 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 $2,700 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 Schedule H alongside Form 1040 to report the income you paid. An accountant should be able to assist with this process. 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 rules.
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7 Tax Rules to Know if You Give or Receive Cash originally appeared on usnews.com
Update 01/05/24: This story was published at an earlier date and has been updated with new information.
