If you paid someone in cash for work they performed, you may have tax reporting requirements. The rules depend on why you paid the person, what type of work they performed, and whether they were an employee or an independent contractor. The method of payment does not determine the tax treatment. Cash payments are generally treated the same as payments made by check, direct deposit, or payment app.
Was the Work Related to a Business?
If you paid someone to perform services for your business, you may be required to report those payments.
Independent Contractors
Independent contractors are generally self-employed individuals who control how and when they perform their work. Examples may include:
- Freelance designers
- Bookkeepers
- Consultants
- Handymen
- Landscapers
- Independent cleaners
If the worker was an independent contractor and you paid reportable compensation for services performed in connection with your business, you may need to issue Form 1099-NEC, Nonemployee Compensation. The IRS uses this form to report payments made to workers who are not treated as employees. You may expense the contract labor you paid to independent contractors under the General Expenses section of your Schedule C.
Employees
If the worker was your employee, payments are generally considered wages and are reported on Form W-2, not Form 1099-NEC. Employers may also have payroll tax withholding and reporting obligations. Worker classification is based on the facts and circumstances of the relationship, including the degree of control exercised over the worker. You may expense the wages you paid employees under the General Expenses section of your Schedule C.
Was the Work for Personal Reasons?
Many users pay individuals for personal services, such as:
- Babysitting
- Lawn care
- House cleaning
- Home repairs
- Painting a personal residence
In most cases, personal expenses are not deductible on a federal income tax return and do not need to be entered in our software as deductions. However, special rules can apply if the worker is considered a household employee, such as a nanny or in-home caregiver. Those situations may require additional reporting.
What Records Should I Keep?
Even if you paid the worker in cash, keep documentation showing:
- The worker's name and address
- The dates work was performed
- The amounts paid
- Any invoices or receipts
- The worker's taxpayer identification number, if required
Good records can help support deductions and assist with any required reporting.
Entering Information in the Software
We do not support the filing of 1099-NECs or W-2s for contract labor or employees. However, you can expense the contract labor and/or wages you paid on your Schedule C by going to:
- Federal
- Income (Select my forms)
- Profit or Loss from Business
- General Expenses
Frequently Asked Questions
Does paying someone in cash mean I do not have to report it?
No. Tax reporting rules generally apply regardless of whether you paid by cash, check, direct deposit, or another payment method.
How do I know whether someone is an employee or an independent contractor?
The IRS considers factors such as behavioral control, financial control, and the overall relationship between the parties. The determination is based on the facts of each situation rather than how the worker is paid. Use this resource from the IRS to help you make the determination.
I paid a contractor in cash but never issued a Form 1099-NEC. Can I still deduct the expense?
Deductibility and information reporting requirements are separate issues. Keep accurate records of the expense and review the applicable reporting requirements for your situation. [irs.gov]