Why do you keep using the word “gross” all the time…?

You’ve probably heard the term “gross receipts” and wondered what that means. No, it’s not cash register tape that’s…like…sticky. (I hate ‘sticky’…) “Gross receipts” is the total amount of compensation you received before any expenses are deducted. Accounting types (like me!) will also refer to this concept as “revenue” or sometimes “gross income”.

This “gross” concept can pop up in different places on your tax return. We might have “gross wages”, which we find on your Forms W-2. Or there’s “gross rents” which is everything you collected from your renters if you have rental properties. However, the place where I see the most confusion with “gross receipts” is with self-employment income.

Gross receipts from self-employment income generally include every dime you receive in the course of doing business. It may be reported to you on Form 1099-NEC. This form is provided to you if you earned $600 or more from any one payer during the tax year. Guess who else this form is provided to…that’s right – the IRS! If you fail to report gross income from Form 1099-NEC on your tax return (likely on Schedule C), you will get a friendly note from the Federal government that includes a bill for the unpaid tax along with interest and penalties to keep it company. That’s generally not something we want to encourage, so we have to make sure to report all that revenue.

But what happens if you don’t receive a Form 1099-NEC? If you earn less than $600 from somebody, that income is not taxable, right? Yeah, no. The reporting threshold for Form 1099 has nothing to do with whether or not the income is taxable. The $200 you earned at that one-off wedding gig? Taxable. The student that pays you $50 a week in cash for private lessons? Taxable. The Zelle or Venmo payments you receive for providing a service to a client? Taxable. Essentially any money you receive in the course of your freelance business is taxable and should be included with your Schedule C gross receipts.¹

But, what if you don’t get 1099s from your students and didn’t get them from several of the gigs you played. How are you supposed to figure this out? Well, gentle taxpayer, you must acquaint yourself with the concept of record keeping. You are running a business, so you have to do some work behind the scenes to keep track of this business. You don’t have to get QuickBooks or take accounting classes (been there/done that). But you do need to figure out a system so you can accurately report your income.

So where should you start? Well, there are a couple things you can do to get organized. The first thing I would recommend is to open a checking account for your self-employed business income only. Deposit all your self-employment gross receipts into that account (and nothing else — keep any W-2 wages or other types of income in a separate account). That way, at the end of the year, you can run a report of the business account’s activity and add up all the deposits. You can also use this account to pay business expenses when possible. Whatever is leftover can be transferred into your personal account.

A dedicated bank account is something the IRS loves. They also love a dedicated credit card. If you are a credit card person, designate one as your “business” card and use it only for business expenses. That will make tax time a little easier too.

Finally, to pull it all together, you can look into a budgeting or accounting program like You Need a Budget (“YNAB”) or Xero. This is kinda for extra credit, but it can give you some insight into how much you’ve earned year-to-date (helpful for estimated taxes) and can give you reports at tax time. And, not surprisingly, it can help you set your budget.

1. Gross rant: If you give me a stack of 1099-NECs and say that’s 100% of your freelance gross income…but I know you teach and I’m pretty sure I played a gig with you that isn’t on a 1099…I will not believe you and will ask again about your total gross receipts. I’ve got liability too…especially if I believe you’re intentionally underreporting your income. That’s also known as “fraud”. The IRS preparer penalties for me if you (we) are caught are not worth the tax prep fee you pay. I will not think twice about telling you to find another CPA if I know, or strongly suspect, that you are being dishonest about this. /rant ↩︎

_{This information is for entertainment or educational purposes only. Please consult your tax advisor for advice on your specific tax situation.}