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I work as a consultant (1099) for a startup that has not paid my bills since June. Since I have not had any income I have not paid withholding since then.

How do I handle my US personal income taxes on this? The company has been billed for 6 months salary which has not paid (and, in the worst case, will not be paid). Do I declare as income only the money I have actually received, and file an amended return when/if the back pay comes in? Count the unpaid salary as a business loss? Or is it income in the year it is paid and not the year it is earned?

And how does withholding work? I missed 2 estimated withholding payments because I did not receive the income. My payments cover the income I have actually received. Will I be penalized for the missing payments? How about if I file an amended return when I receive the income, will that mean that I will just owe the extra taxes then, or will I be penalized for not withholding at that time?

Thanks

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    Are you cash-based or accrual-based?
    – littleadv
    Commented Jan 8, 2016 at 6:32
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    To expand a bit on the comment by @littleadv, if your business is cash based, you pay taxes on income that you receive; if it's accrual based, you pay taxes on what you bill. That's oversimplified, but it's the essence of the issue, and it's hard to give a useful answer without knowing that. If you're "just" a consultant, i.e., all you sell is your services, you're probably cash based. Commented Jan 8, 2016 at 11:45
  • Thanks, I'm cash-based. This means I'll take a hit on taxes next year when (with luck) I get 18 months salary in 12 months. Still better than not getting it though.
    – russell
    Commented Jan 9, 2016 at 14:35

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As others have said, make sure you can and do file your taxes on a cash basis (not accrual). It sounds like it's very unlikely the company is going to issue you a 1099 for invoices they never paid you. So you just file last year's taxes based on your income, which is the money you actually received.

If they do pay you later, in the new year, you'll include that income on next year's tax return, and you would expect a 1099 at that time.

Side note: not getting paid is unfortunately common for consultants and contractors. Take the first unpaid invoice and sue them in small claims court. After you win (and collect!), tell them you'll sue them for each unpaid invoice in turn until they pay you in full. (You might need to break up the lawsuits like that to remain under the small claims limit.)

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    I would assume that a small startup may not be able to pay even if the lawsuit is won ;)
    – Joe
    Commented Jan 8, 2016 at 18:03
  • @Joe Possibly true, but to avoid paying they would have to declare bankruptcy which would prevent them from hiring any more consultants and declining to pay them. Or live with an outstanding lawsuit, which would also affect their credibility. Commented Jan 8, 2016 at 19:46

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