Tax Rules to Know If You Give or Receive Cash
By Susan Johnston

As the American workforce shifts away from a full-time employee model to a gig economy
where workers earn income from a patchwork of different projects, tax time can be more

If you work odd jobs to supplement your income -- say a neighbor pays you for dog walking,
tutoring or house cleaning -- then you're still supposed to report that money as income to
the IRS even if you're not getting a W-2 (the income-reporting tax form used for employees)
or 1099 (the income-reporting tax form used for independent contractors).

"Whether you get it in cash or check, if you're performing a service and getting paid for that,
it's income," says Paul Gevertzman, a partner at the accounting firm Anchin, Block &
Anchin in New York. "You're required to report it, and that's your responsibility, whether or
not anybody else reports it."

Here's a look at what you need to know about giving or receiving income through
person-to-person transactions.

If You Give Cash Payments

Say you pay a babysitter or nanny to watch your children. Many parents may not realize that
they need to take some extra steps to comply with tax laws. "If someone, like a nanny,
works out of your house on a full-time basis and doesn't have a business, they're supposed
to get a W-2 from you," says Andrew Schwartz, founder of Schwartz & Schwartz, an
accounting firm in Woburn, Massachusetts. The deadline for issuing W-2s to employees
this year was Feb. 2.

To determine whether the IRS views your child care provider, gardener, cleaner or other
worker as a household employee, Gevertzman suggests looking at how much control and
autonomy the person has. "Do they perform it for others on a regular basis?" he asks. "Do
they come to your house, or do you drop the kids off at their house? Are they operating it as
a business, which would lean towards being an independent contractor?"

If you're paying an individual at least $1,900 a year, you're also legally supposed to withhold
Social Security and Medicare taxes from their pay and pay the employer portion of those
taxes, just as a company would do for its employees. "You have to file paperwork, and
states have different rules than the IRS," Schwartz says. "Some states have quarterly filings,
but in Massachusetts, it's actually monthly." IRS Publication 926 details the tax laws around
household employees.

If You Receive Cash Payments

If you're the one receiving funds through a person-to-person transaction, then you need to
keep track of those payments and tips whether or not you're issued a W-2 or 1099. "If
they're a cab driver, they may want to keep track of tips not reported to their employer. A
bartender is supposed to report all their tips to their employer," says Andrew Poulos,
principal of Poulos Accounting & Consulting near Atlanta. "If they get tips that are not
reported to the employer, they are still legally supposed to claim those tips on Form 4137
with their tax return." IRS Form 4070 is a different form that's used for reporting tips to an
employer, and employees who receive at least $20 in tips in a month are expected to file
on the 10th of the following month.

Money earned through services like is also taxable (though you'd receive
payment via check or PayPal, not in cash). If you run a side business or a full-time business
-- say you freelance as a graphic designer, writer or chef -- then you may need to file Form
1040 (Schedule C) with your tax return.

"Disclose all your income accurately," Poulos says. "Cash-based business gets audited,
and they're not just going to go based on the 1099. They're going to go based off of bank
statements, and if you report that you've made $30,000, and they get your bank statement
and start adding up the deposits [that don't match], you could be in hot water."

How to Use Your Tax Refund to Change
Your Life

Whoo hoo! Ready for a nice, fat refund check from Uncle Sam? Taxpayers received, on
average, $2,696 in refunds last year, the Treasury Inspector General for Tax Administration

All too often that extra money makes people splurge, even while they imagine they're saving
it, says CNBC. How do you make sure this year's windfall makes your life better long term?
We have plenty of ideas.

Put It in Your Paycheck

First, remember that your refund isn't a gift. You earned it but chose to bank with the
Treasury Department instead of taking it in your paychecks. This year, wouldn't an extra
$225 a month make your life a bit saner? If so, do this:
Gather your pay stubs and last year's income tax return.
Use the IRS withholding calculator to learn if you should change the tax amount withheld
from your paychecks. Read the instructions carefully to see if adjusting is a good idea for
Fill out IRS Form W-4, adjusting your withholding amount.
Bring the completed form to your employer's payroll department.
Now for nine ways to make life better with that refund money:

1. Pay Down High-Interest Debt

High interest rates can lead to devastating debt. Eventually you can end up with payments
so large that it becomes difficult to do more than pay the minimum required each month.
That's a losing proposition, Money Talks News founder Stacy Johnson says: "Suppose
you've got a $10,000 credit card debt and pay 15 percent interest. If you pay $250/month,
you'll pay the card off in five years and pay about $4,000 in interest. But lower the interest to
10 percent, and the same $250 will pay the card off in only four years, with an interest tab of
$2,215. The lower rate saves you nearly $2,000 and a year of debt."

Here's the No. 1 rational thing to do with a windfall: Use it to pay down, or pay off, if you can,
your debts with the highest rates. Think of this way: Paying off a debt with a 15 percent
interest rate is like earning 15 percent, risk-free and tax free; something virtually impossible
to find these days.

When you've paid down your debt, don't stop. Your goal should always be to improve your
life. Charging and borrowing leads you in the opposite direction. If credit-card debt, payday
loans or other high-rate debts have been a problem for you, use this moment to escape the
cycle. Choose from the trustworthy sources of free credit counseling and get help so your
2014 refund improves your life permanently.

2: Pay Off Small Debts

Paying off high rate debt first makes sense, but it may not work for you. Some people get
more motivation from demolishing smaller debts first. "If you can focus enough to pay off
your debts in a relatively short amount of time, the higher interest rates on other accounts
may not add up to much extra money," U,S, News explains. Money Talks News has said the
same in posts like The Best Way to Pay Off Debt. Of course be careful here, too, not to run
up new debt and dig yourself back into the same hole.

3. Fatten Your Emergency Fund

You are debt-free? Bravo! In that case, strengthening your financial safety net may be the
next best use of a tax refund. Opinions differ on how much to save for emergencies. Many
experts advise keeping enough money to cover your expenses for six months. But maybe
the question is: If you lost your job, how long could you expect to be unemployed?

FiveThirtyEight, an economics blog, says how long people are unemployed depends on
what the economy is like when they lose their jobs. That's obvious, I suppose, but it tells you
the goal for your emergency fund may vary: smaller in fat times, larger in lean ones. The
size of your fund also may vary depending on how hard it is to find work in your field, or how
stable your current job is. And your savings should be greater if you're older because it
often takes older workers longer to find work.

MarketWatch quotes AARP's 2014 analysis of data from the Bureau of Labor Statistics on
the average length of unemployment for workers:
Age 54 and younger: 34.7 weeks.
Age 55 and older: 45.6 weeks.
I know someone who lived on savings for a couple of years while hunting for work during the
recession. He'd set aside a big bonus so he did OK, but the experience made such an
impression that he now tries to keep a year's worth of savings for an emergency.

4. Save for Retirement

Retirement savers are a lot like professional football players, says Money Talks News
writer Maryalene LaPonsie. They keep their eye on the clock, for instance. And they accept
that you can make progress a few yards at a time. Read her six tips for retirement savers.

5. Save for College

Whether it's your education or that of your kids, apply your refund check to a college
savings plan or 529 plan that offers tax benefits in addition to saving for college.

6. Invest in Your Productivity
Get more education. Sign up for a workshop or course or go to a conference or webinar,
whether to upgrade your skills or try out a new field.
Subscribe. Sign up for professional publications, or the Wall Street Journal and New York
Times, or cable TV or satellite radio channels that help your work acumen. Buy software
you need to get ahead. Buy a premium LinkedIn subscription to network or find work.
Invest in the right clothes. Get a tasteful, understated but impressive outfit for work or job
interviews, one that makes you feel like a million bucks. Include good shoes.
Buy the equipment you need. Get the new laptop, tool or piece of electronic equipment you
need to move ahead in your field.
Get therapy. Career advancement isn't only about the right tools, skills and credentials. A
chip on your shoulder, depression, anxiety, a fear of success or problems at home can
prevent you from reaching your earning potential. See WebMD's thorough primer, How to
Find a Therapist.

7. Hire a Career Coach

Career coaching can help you learn your strengths, identify where you could use help, set
goals and strategize. There are many ways coaching can help further your career. "Some
people want to be coached through their job search, but others want help with their current
work performance," Hallie Crawford, certified career coach and founder of the
Atlanta-based company Create Your Career Path, tells U.S. News.

"After an initial free consultation, most coaches charge hourly fees, ranging from $50 to
$500 (the priciest tend to be coaching sessions with executives)," Next Avenue says: "The
average cost is $161 an hour, according to the International Coach Federation." Get
started with The Wall Street Journal's How to Find a Career Coach.

8. Contribute to Charity

Do good for others while helping yourself earn a healthy tax deduction on your 2015 taxes
by supporting a charitable cause. Make sure to get a receipt for your contribution, and be
sure the organization you support is a legitimate 501(c)(3) charity, defined here by the IRS.

9. Start a Business

Make your money your grubstake. Start the business you've been dreaming of, whether
consulting, opening a coffee cart or retail outlet, selling your crafts or patenting an invention.

Bonus: Four Idiotic Ways to Blow Your Refund

Because tax refunds inspire some of the dumbest splurging possible, we feel duty-bound to
warn you against:
Frittering it away. Won't you feel like a dope if your money's gone and you can't say where it
went? If you must spend it on consumption, use it for something memorable -- maybe an
experience with family or friends that you'll remember forever.
Going on a spree at the mall. Impulse buys are like drinking too much: You feel icky in the
morning. When spending your refund check, aim for something that gives a feeling of
increased safety and security.
Creating more debt. Don't use that refund as a down payment on a car that puts you deeper
in debt. Put that money instead in a bank account dedicated to saving enough to pay cash
for a used car.
Letting it gather moss. There's no standing still with money. Either it's growing in value or
inflation (even the modest inflation today) is eating it away. Here's Johnson's guidance on
investing in mutual funds.
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