2019 was my first full year mystery shopping. I have a really quick question for all of you.

Do we just report on the taxes what we were paid in 2019 or what we earned in 2019. For example, I did shops in December, they got approved in December but got paid in Jan 2019 (or will be in the coming weeks).

Do I have to report the $$ on 2019 or 2020 taxes that I did in 2019 but not paid until 2020.

thank you

You claim pay in the month/year you receive it, regardless of when you earned it.

Grille, not quite. You can choose to do it either way -- but once you choose a method (accrual or actual), you MUST use it always and forever (as long as you're reporting business income, at least).

The simplest and easiest is "actual" -- if you receive it during a tax year, you report it as taxable income in that year.

OP, you can get the info you seek directly on the IRS website.

My understanding is similar to Cease's. If you account on a cash basis (I think that's the same as "actual", you count the income in the year in which it's received, not in which it's billed. That's how I've always reported it in more than 30 years of self-employment.

Birdy, I think, actually, "cash" is the correct nomenclature.

Yes, "cash" and "accrual" are your choices. My personal preference has been "accrual" because it allows me to do year end tax planning for expense adjustments by 12/31.

So my return for 2019 will show everything I earned during the year, regardless of when I received it. If eventually I do not receive payment, I can deduct in a future year as a 'bad debt'.

Tax planning is tougher with the "cash" choice. It is possible for you to receive a mailbox full of checks on 12/30 and 12/31 that could send you scrambling to make business purchases to reduce your bottom line profit (and therefore tax liability as well as self-employment tax obligations).

What throws me is this: Companies that send a check dated 12/30/19 that I receive and cash a week later.

On a cash basis, when do I count this income?

@1cent wrote:

What throws me is this: Companies that send a check dated 12/30/19 that I receive and cash a week later.

On a cash basis, when do I count this income?

In the year in which you actually have the check in your hands, according to what I was told by a CPA who used to do my taxes. I asked him the same question once.

"Tax planning is tougher with the "cash" choice. It is possible for you to receive a mailbox full of checks on 12/30 and 12/31 that could send you scrambling to make business purchases to reduce your bottom line profit (and therefore tax liability as well as self-employment tax obligations)."

Seriously?

Just cash 'em January 2.

@ceasesmith wrote:

"Tax planning is tougher with the "cash" choice. It is possible for you to receive a mailbox full of checks on 12/30 and 12/31 that could send you scrambling to make business purchases to reduce your bottom line profit (and therefore tax liability as well as self-employment tax obligations)."

Seriously?

Just cash 'em January 2.

Cease is right. I should have said in my earlier response about checks, "when you have the cash in your hands or bank account." If you get a check on 12/30, you can hang on to it and cash it after the first of the year.

If you're keeping a close eye on your income/profits all year long and you know what your outstanding receivables are and that you probably will get them prior to the year end, you can make purchases before year's end to offset profits. So, do it ahead of time, not wait until you get the money.

Actually, this is a good question.

Assuming this payment will be included on your 1099 from that MSC for 2019, and you receive it 1/6/2020...you will STILL count it in 2020.

Your 1099 for 2019 will be "off" by the amount of that payment. Your 1099 for 2020 will be "off" by the same amount. As far as the IRS is concerned, being short one year and over the other = everything is hunky dory.



(That is, it all balances out in the long run.)

Conversely, you can use your 1099s to the penny, and not even think about when you received the funds.

If I haven't confused you enough, you can get the info you need directly on the IRS.gov website.

I suggest you only do that if you find you are not yet adequately confused.



(Who says I don't have a sense of humor????)

@1cent wrote:

What throws me is this: Companies that send a check dated 12/30/19 that I receive and cash a week later.

On a cash basis, when do I count this income?

Edited 1 time(s). Last edit at 01/25/2020 01:37PM by ceasesmith.

I greatly prefer this forum to Volition where I always seemed to be getting my hand slapped by the forum owner! But what I DO miss about Volition was the tax thread that all tax related questions nicely in one place. That was so helpful.

There used to be one, a sticky one, on New Shoppers. But I just visited there, and that place is a disaster! I don't know what happened, but all my favorite threads seem to be gone.

Edited 1 time(s). Last edit at 01/25/2020 06:37PM by ceasesmith.

@ceasesmith wrote:

"Tax planning is tougher with the "cash" choice. It is possible for you to receive a mailbox full of checks on 12/30 and 12/31 that could send you scrambling to make business purchases to reduce your bottom line profit (and therefore tax liability as well as self-employment tax obligations)."

Seriously?

Just cash 'em January 2.

My understanding is that under Cash basis accounting the income in reported as earned when you have constructive use / possession of the funds whereas under accrual it is earned when invoiced regardless of when you get paid. So the check in hand on 12/30 or 12/31 represents cash basis income, regardless of whether you actually went to the bank.. Holding the check or cashing the check is not the relevant point. It's whether you had or could have had constructive use. A check received at ten minutes to midnight on 12/31 is income under cash basis.

To another person's point about writing off bad debt. Yes, you can write off bad debt under accrual. But under cash basis you never realize the income in the first place since it was never received. The net impact is that under cash basis you pay for the actual money in hand so never had tax exposure in the first place on money that wasn't collected. Your "write-off" for money a client does not pay is automatic, uncomplicated, and happens earlier in the process.

@BirdyC wrote:

@ceasesmith wrote:

"Tax planning is tougher with the "cash" choice. It is possible for you to receive a mailbox full of checks on 12/30 and 12/31 that could send you scrambling to make business purchases to reduce your bottom line profit (and therefore tax liability as well as self-employment tax obligations)."

Seriously?

Just cash 'em January 2.

Cease is right. I should have said in my earlier response about checks, "when you have the cash in your hands or bank account." If you get a check on 12/30, you can hang on to it and cash it after the first of the year.

If you're keeping a close eye on your income/profits all year long and you know what your outstanding receivables are and that you probably will get them prior to the year end, you can make purchases before year's end to offset profits. So, do it ahead of time, not wait until you get the money.

IRS constructive use rules would say that either a check or deposited cash would represent constructive use and would therefore count as income when received. An uncashed check is still income. And an uncashed check received after the last potential banking hour of the year is also income.

@ceasesmith wrote:

Grille, not quite. You can choose to do it either way -- but once you choose a method (accrual or actual), you MUST use it always and forever (as long as you're reporting business income, at least).

.

It is possible to change methods with good reason. But it's a lot of paperwork with the IRS. It's not a do it yourself type deal, and it is not a given. They have to agree to it, and you'll probably end up adjusting / amending things over a period of time on both sides of the transition so they are confident they've gotten what they are due.. Chose wisely then plan to stay with your chosen method indefinitely. But if you get it wrong you can switch at a cost of increased scrutiny, costs, and effort. Don't plan on switching back and forth.

Cash method is simplest and most like what you're probably already accustomed to as an employee. If you have a dollar, you are taxed on that dollar. If you don't yet have the dollar, you pay no taxes on it yet. On the expense side, if you've spent a dollar, you have the expense. But if you haven't yet written the check you have not yet incurred the expense, even if the bill is due,

Accrual is much more flexible and is the standard used for any business of size. But that flexibility comes with a price paid in complexity. Accrual recognizes the things you bought but have not yet sold and the expenses you have agreed to take on but for which you have not yet written a check, Accrual has distinct advantages whenever there is inventory involved, as for most businesses that operate a storefront or stock things for resale Businesses that resell product but do so only when an order is received and therefore never own inventory that carries into another accounting period may still do OK on cash basis.. As mystery shoppers we are basically service based businesses that can use either method depending on needs or preferences.

@JustForFun wrote:

Accrual is much more flexible and is the standard used for any business of size. But that flexibility comes with a price paid in complexity. Accrual recognizes the things you bought but have not yet sold and the expenses you have agreed to take on but for which you have not yet written a check, Accrual has distinct advantages whenever there is inventory involved, as for most businesses that operate a storefront or stock things for resale Businesses that resell product but do so only when an order is received and therefore never own inventory that carries into another accounting period may still do OK on cash basis.. As mystery shoppers we are basically service based businesses that can use either method depending on needs or preferences.

I gather that for large businesses accrual is the standard method. But I have a business for which I carry inventory in stock. I still use cash basis. Simpler for me, and the numbers involved are paltry in the grand scheme of things.

@JustForFun wrote:

It's whether you had or could have had constructive use. A check received at ten minutes to midnight on 12/31 is income under cash basis.

If you receive a check on 12/31 after your bank closes, do you really have "constructive use" of it, since you don't have "control" over it? There's no way for you to have put it into your bank or cashed it. OTOH, If you receive it on 12/31 and can deposit it, it counts as income. (So, it sounds like if we get a check at the end of December and "can" deposit it, we should.)

From a site on business law and taxes (I couldn't find the applicable IRS rule):

"The principle of constructive receipt is determined by when the person who receives the income had control over it. An individual or company is considered to have control over income when it is credited to that person or company. Basically, it's when you could spend that income if you wanted, even if you don't spend it.

If you receive a check and you don't deposit it, it's still under your control (you can deposit it any time), so it counts as income.

If you deposit a check, and the bank puts a hold on it, it's not under your control (you can't use it), so you don't have control over it and it doesn't count as income."

In the above situation, as unlikely as it may be, if you get a check in the mail on 12/31 at 4 p.m., but your bank closed at 2 p.m., then the funds aren't really under your control. So you don't have to count it as income.

Nit-picky point, but it does show that every "rule" generally has an exception. Which is why I would never do my own taxes!

Some things are worth nit-picking over, some things are not.

If I got a check (or 100 checks) in the mail on 12/31, I would deposit/cash them on January 2.

Unless, of course, it was an amount that would actually impact my taxes owed. Like maybe $10,000-$2,000,000. And I guarantee you my bank will put a hold on a check that size, so I won't have "constructive possession" of it anyway.

If I get a bunch of checks for $30 or $45 each, nope, ain't gonna sweat it, folks. IRS will get their money, it'll just be next tax year that I report it in.

I use the cash method. In addition to simplifying (for me) the revenue side, it also means that I "book" expenses when they occur. So, I go to Five Guys in December and I record the expense. I get reimbursed in January, si it actually counts as being January income, but the following December I am again likely to have expenses that will not be reimbursed until the next year. To me, an expense is a reality when the money leaves my wallet, and I want it reflected on my books immediately. Suppose the Five guys shop gets rejected. The December expense has already been recorded. There is no January revenue. there is no reason to worry about bad debts.

Since this has been asked before, the fee for the "rejected" Five Guys shop is not a bad debt and you can't deduct it from income. Under the accrual method, you would have booked the fee as revenue in December, and later when the shop as rejected, you would have to account for the non-payment of the fee. The cash system takes care of it automatically.

@ceasesmith wrote:

If I got a check (or 100 checks) in the mail on 12/31, I would deposit/cash them on January 2.

Unless, of course, it was an amount that would actually impact my taxes owed. Like maybe $10,000-$2,000,000. And I guarantee you my bank will put a hold on a check that size, so I won't have "constructive possession" of it anyway.

If I get a bunch of checks for $30 or $45 each, nope, ain't gonna sweat it, folks. IRS will get their money, it'll just be next tax year that I report it in.

I'm with you, Cease, despite whether or not you "can" or "cannot" deposit or cash those checks. As long as you cash and count them as income for January., it all comes out in the wash, as they say.

With the amounts of $$ involved, let's face it: Nobody is going to come after us to nit-pick "constructive use." My bank puts a hold on anything over $200, anyway. Like anything under $200 is going to make a hill of bean's worth of difference in my taxes. LOL.



Edited 1 time(s). Last edit at 01/26/2020 05:31PM by BirdyC.

EXACTLY! Wow, I'm shocked -- a hold on anything over $200? I bank at WF, and I think the fact they put a hold on checks stinks. Last year's tax refund, direct deposit, they put a 10 day hold on! REALLY? Direct deposit from the U S Treasury, and they put a `10 day hold? I do NOT appreciate being treated like a CRIMINAL!!!

I bank at a local credit union. I recently deposited a check for $1050.00. The teller asked if it was a payroll check. I said it was for tuition reimbursement. She said there would be a 2 day hold on it.

If you receive any 1099s from MSCs it is better to claim the income according to the 1099. A reconciled paper trail rules with the IRS.

I shop for many companies that do not send 1099's -- it's possible to earn several thousand dollars with various MSCs without going over $600 on any one MSC. Therefore, my total is always greater than the totals on my aggregated 1099s.

Remember, we are supposed to report it as income, even if we do not exceed the $600!

@BirdyC wrote:

@JustForFun wrote:

Accrual is much more flexible and is the standard used for any business of size. But that flexibility comes with a price paid in complexity. Accrual recognizes the things you bought but have not yet sold and the expenses you have agreed to take on but for which you have not yet written a check, Accrual has distinct advantages whenever there is inventory involved, as for most businesses that operate a storefront or stock things for resale Businesses that resell product but do so only when an order is received and therefore never own inventory that carries into another accounting period may still do OK on cash basis.. As mystery shoppers we are basically service based businesses that can use either method depending on needs or preferences.

I gather that for large businesses accrual is the standard method. But I have a business for which I carry inventory in stock. I still use cash basis. Simpler for me, and the numbers involved are paltry in the grand scheme of things.

I have done this as well. My accountant initially freaked out and said I can't do it under cash basis accounting. But he later relented as long as the purchases of stock were "de minimus" or inconsequential to the overall dollar amounts in the grand scheme of things. In my case I keep on hand certain items that a client may commonly need in an emergency and sell them if and when it comes up. That may happen 10 minutes after I buy them, or ten years, or never.

I write off the expense as "supplies" when the money is spent and book the eventual income as "incidental supplies" when I sell something without attempting to tie out the quantities on either side or match the specific item to the original purchase. That means I have no data on whether I made anything on a specific item or category of items, as I would for a large sale of something sold to order. I know what I spend on supplies and I know what I sold from supplies. In a given year it's typically a wash, give or take a hundred dollars one way or the other. But have no idea what the current value of the supplies on hand is, or whether that asset value number is larger or smaller than a previous year. I do it as a convenience to my customers and try not to lose my shirt doing so.

@ceasesmith wrote:

EXACTLY! Wow, I'm shocked -- a hold on anything over $200? I bank at WF, and I think the fact they put a hold on checks stinks. Last year's tax refund, direct deposit, they put a 10 day hold on! REALLY? Direct deposit from the U S Treasury, and they put a `10 day hold? I do NOT appreciate being treated like a CRIMINAL!!!

I know, right? I have accounts at WF, too, and they hold anything over $300, whereas my credit union's hold amount is anything over $200. I went to deposit a check from Fidelity Investments, and they actually put a hold on it! C'mon; Fidelity can buy and sell my credit union 10 times over, or more. And they're holding it? It was a 401k withdrawal that my husband made. I couldn't believe they put a hold on it!



Edited 1 time(s). Last edit at 01/27/2020 01:48AM by BirdyC.

I think that you are running into the issue of fake checks. They should know Fidelity is reputable, but can they detect a fake check? This is a growing problem. The fake postal money orders are now so good that Postmasters can't identify the fakes. How many threads discuss fake checks that shoppers get from scammers? Also, does the average bank teller know who Fidelity is? What if it said Fidelty? [Did you notice the missing i ?] All too often, it is easier to make and enforce blanket rules that it is to try to deal with individual cases.

@BirdyC wrote:

I know, right? I have accounts at WF, too, and they hold anything over $300, whereas my credit union's hold amount is anything over $200. I went to deposit a check from Fidelity Investments, and they actually put a hold on it! C'mon; Fidelity can buy and sell my credit union 10 times over, or more. And they're holding it? It was a 401k withdrawal that my husband made. I couldn't believe they put a hold on it!

All this talk about when and where and if the bank is closed already makes my head spin. I have always, for years and years, just reported the income in the year I did the shop. I can close out the year in my mind for tax purposes and move on without having to remember this or that for next year. I do not do my tax return until April something though and by then everything "should" have been reimbursed. I guess i should never do a shop for the 90 days or later payers in December!
I have never been audited on this. On the other side I report investment income based on when it is on my statement from the investment company. So for some of the interest I receive my investment company gets it a few days earlier than it is posted to my account. I use the posting to me date even though the investment paying the interest has probably sent it to the investment firm in my name and they received it in a different year.
I have never been audited but as most investments state, past experience is not a predictor of the future. So at any time I may be audited. You need to carefully consider how you want to do this as it is a pain to change your method.

Hi everyone. Does anyone know of any mystery shopping company who has an income tax return shop in 2020? Thanks for reading.