Self-Employed I’m Newly Self-Employed: What is Cash Basis Eligibility? Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by TurboTaxLisa Published Oct 14, 2016 - [Updated Nov 8, 2016] 2 min read If you are newly self-employed you may have heard the terms cash basis method of accounting versus accrual basis and may be wondering what cash basis eligibility is and how you should be accounting for your business income and expenses. In general, most individuals and many sole proprietors with no inventory can use the cash method so if you are driving for Uber or Lyft or are making money as a freelancer you most likely able will be able to use the cash method of accounting. Under the cash basis method you include income you actually or constructively receive during the year and deduct expenses for your business in the year you actually pay them. Am I Eligible for Cash Basis Accounting? If you produce, purchase, or sell merchandise in your business you would be keeping an inventory requiring you to use the accrual method to account for your business income and expenses, however, there is an exception to this rule. If your average annual income for the past 3 years is $1 million or less and your business is not a tax shelter you are eligible for the cash basis method. There are more exceptions to this rule too. If you are a qualifying small business who: Has average annual gross receipts for the last three years more than $1 million but not more than $10 Million You are not prohibited from using the cash method Your principal business activity is an eligible business What if I didn’t Own My Business for 3 Years? If you are just getting started in your business you can base your average income on the period of time you have been in existence. The majority of individuals, partnerships, and S corporations are eligible to use the cash basis method of accounting. The cash basis method is a simple, straightforward method to use and may save you money on your taxes since you only account for your income on your taxes when it is received. Don’t worry about knowing all of the rules for cash basis versus accrual method. At tax-time, TurboTax will ask you simple questions about your business income and expenses and give you your business tax deductions you deserve based on your entries. You can also use QuickBooks Self-Employed, which will help you separate your business and personal expenses and automatically export the information to your tax return in TurboTax. Previous Post Self-employed? Here’s What Obamacare Means for You Next Post How to Determine My Federal Income Tax Rate If I’m… Written by Lisa Greene-Lewis Lisa has over 20 years of experience in tax preparation. Her success is attributed to being able to interpret tax laws and help clients better understand them. She has held positions as a public auditor, controller, and operations manager. Lisa has appeared on the Steve Harvey Show, the Ellen Show, and major news broadcast to break down tax laws and help taxpayers understand what tax laws mean to them. For Lisa, getting timely and accurate information out to taxpayers to help them keep more of their money is paramount. More from Lisa Greene-Lewis Follow Lisa Greene-Lewis on Twitter. One response to “I’m Newly Self-Employed: What is Cash Basis Eligibility?” Hi Lisa, I just started a side gig/ freelance business. I buy all my inventory with cash from places like offer up/ craigslist,etc How can i record these expenses so i can keep a proper record so i can pay the proper taxes next yr. Also i have a full time job so would i be considered a self employed aslo?please advise thanks in advance Reply Leave a ReplyCancel reply Browse Related Articles Business Income 5 Tax Tips for Starting a New Business Tax Planning Year-End Small Business Tax Tips Self-Employed A Parent’s Guide to NIL Tax Tips Tax Filing Tips for Bloggers Self-Employed Does Tutoring Make Me Self-Employed? Self-Employed 6 Tips to Help Side Hustlers and Self-Employed Bosses S… Self-Employed How to Start a Side Hustle Self-Employed How Do I Amend My Previous Quarterly Estimated Tax Paym… Self-Employed 7 Tax Deductions for Wedding Planners Self-Employed Real Talk: I Missed the Estimated Tax Deadline. What Sh…
Hi Lisa, I just started a side gig/ freelance business. I buy all my inventory with cash from places like offer up/ craigslist,etc How can i record these expenses so i can keep a proper record so i can pay the proper taxes next yr. Also i have a full time job so would i be considered a self employed aslo?please advise thanks in advance Reply