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If I earn self-employment income for, e.g, taking someone's photo in late December but don't receive payment for that service until January and my tax year matched the calendar year, does that income count in the year the December was in or in the next year?

Does this answer change at all when the Earned Income Tax Credit is taken into consideration?

  • Is this a business? There are more favorable tax considerations for money derived from hobbies. – quid Jan 4 at 18:32
  • Not a business. – NeutronStar Jan 4 at 23:07
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It depends on whether your small business is using cash basis or accrual basis accounting. With cash basis you recognize income when received, so if you got paid in January 2019 that income would be reported on your 2019 tax return filed in 2020. With accrual basis accounting you recognize the income when it is earned, so income from a photo shoot in December, 2018 would be reported on your 2018 tax return.

Most small businesses use cash basis because it is significantly more simple. Once you pick a method you actually have to request approval from the IRS to change it (it's not an uncommon switch to make, but it can be complex).

The Earned Income Credit could certainly be affected, the income could result in more or less EIC based on where you fall between the thresholds for qualifying since EIC has both minimum and maximum income thresholds. For a photography business, cash-basis typically makes much more sense than accrual, I wouldn't suggest letting EIC impact affect how you choose to account for business income.

  • If it's not a business but a hobby, does that change things? – NeutronStar Jan 4 at 23:08
  • @Joshua Maybe, but likely not in your case, you can't deduct hobby expenses to offset income unless you itemize deductions. I've not found any source suggesting that you can't use the accrual method for hobby income, but even if allowed I'd imagine it is exceedingly rare. If you filed it as business income you could deduct related expenses without itemizing but would maybe have self-employment tax. There are other rules for the expenses, but the income all comes into your 1040 in either case – Hart CO Jan 4 at 23:51
  • So wait, I can file it as hobby income and avoid the self-employment tax? I didn't know this. – NeutronStar Jan 5 at 1:11
  • @Joshua Yeah, if it qualifies as a hobby you don't pay self-employment tax on the income. You do miss out on the 20% pass through income deduction and likely miss out on the ability to deduct expenses that would offset that income. There are many articles out there on hobby vs business guidance, many of them are good but note that some may be out-dated as 2018 introduced the 20% pass through income deduction. – Hart CO Jan 5 at 1:24
  • @ Is hobby income still earned income for the Earned Income Credit? – NeutronStar Jan 5 at 1:33

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