Ask the taxgirl: Reporting Year End Income

Taxpayer asks:

I have a question about my Paycheck that will determine my Taxes in 2009/10. I get paid Bi-weekly and I get paid this Friday. The next two weeks I wrk will that check be on my 2009 Taxes or rollover into my 2010 Taxes.

Taxgirl says:

The general rule is that cash-based taxpayers are responsible for reporting income either when it’s received or when it becomes available. Basically, if you have a check in hand or funds in your bank via direct deposit.

Of course, there are some caveats. You can’t refuse to pick up your check or just put it in a drawer and walk away until January. That’s what the “becomes available” bit is about. If you could take the income by the end of the year, it’s reportable for that tax year, even if you don’t take it.

But if your employer hasn’t written your paycheck or you otherwise don’t have access to that income (or if it’s subject to a significant penalty if you take it), it’s not taxable until you have the opportunity to take it. That’s true even if you’ve done the work or made the sale.

Again, that’s for cash-based taxpayers. Accrual-based taxpayers are responsible for reporting income when it comes due (generally, when you invoice for services or when the terms of any contract are completed).

The large majority of individual taxpayers and small businesses are cash-based. You have to elect with the IRS to be accrual-based. If you don’t know what I’m talking about, you’re probably cash-based.

So, in your case, assuming you’re cash-based (and I’d be willing to bet the snow-covered house on it), you’ll be taxed on your paycheck from Friday in 2009 – these last two weeks will be taxable in 2010.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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