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 3. Businesses and Self-Employed
 4. Small Business and Self-Employed
 5. What is Taxable and Nontaxable Income?


WHAT IS TAXABLE AND NONTAXABLE INCOME?

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You can receive income in the form of money, property, or services. This section
discusses many kinds of income that are taxable or nontaxable. It includes
discussions on employee wages and fringe benefits, and income from bartering,
partnerships, S corporations, and royalties. The information on this page should
not be construed as all-inclusive. Other steps may be appropriate for your
specific type of business.

Generally, an amount included in your income is taxable unless it is
specifically exempted by law. Income that is taxable must be reported on your
return and is subject to tax. Income that is nontaxable may have to be shown on
your tax return but is not taxable. A list is available in Publication 525,
Taxable and Nontaxable Income.

Constructively-received income. You are generally taxed on income that is
available to you, regardless of whether it is actually in your possession.

A valid check that you received or that was made available to you before the end
of the tax year is considered income constructively received in that year, even
if you do not cash the check or deposit it to your account until the next year. 
For example, if the postal service tries to deliver a check to you on the last
day of the tax year but you are not at home to receive it, you must include the
amount in your income for that tax year.  If the check was mailed so that it
could not possibly reach you until after the end of the tax year, and you could
not otherwise get the funds before the end of the year, you include the amount
in your income for the next year. 

Assignment of income.  Income received by an agent for you is income you
constructively received in the year the agent received it.  If you agree by
contract that a third party is to receive income for you, you must include the
amount in your income when the party receives it. 

Example. You and your employer agree that part of your salary is to be paid
directly to your former spouse.  You must include that amount in your income
when your former spouse receives it. 

Prepaid income.  Prepaid income, such as compensation for future services, is
generally included in your income in the year you receive it.  However, if you
use an accrual method of accounting, you can defer prepaid income you receive
for services to be performed before the end of the next tax year.  In this case,
you include the payment in your income as you earn it by performing the
services. 


EMPLOYEE COMPENSATION

Generally, you must include in gross income everything you receive in payment
for personal services. In addition to wages, salaries, commissions, fees, and
tips, this includes other forms of compensation such as fringe benefits and
stock options. 

You should receive a Form W-2, Wage and Tax Statement, from your employer
showing the pay you received for your services. 

Childcare providers.  If you provide child care, either in the child's home or
in your home or other place of business, the pay you receive must be included in
your income.  If you are not an employee, you are probably self-employed and
must include payments for your services on Schedule C (Form 1040 or 1040-SR),
Profit or Loss From Business. You generally are not an employee unless you are
subject to the will and control of the person who employs you as to what you are
to do and how you are to do it. 

Babysitting.  If you babysit for relatives or neighborhood children, whether on
a regular basis or only periodically, the rules for childcare providers apply to
you.


FRINGE BENEFITS

Fringe benefits you receive in connection with the performance of your services
are included in your income as compensation unless you pay fair market value for
them or they are specifically excluded by law.  Abstaining from the performance
of services (for example, under a covenant not to compete) is treated as the
performance of services for purposes of these rules. 

Recipient of fringe benefit.  You are the recipient of a fringe benefit if you
perform the services for which the fringe benefit is provided.  You are
considered to be the recipient even if it is given to another person, such as a
member of your family.  An example is a car your employer gives to your spouse
for services you perform.  The car is considered to have been provided to you
and not your spouse. 

You do not have to be an employee of the provider to be a recipient of a fringe
benefit. If you are a partner, director, or independent contractor, you can also
be the recipient of a fringe benefit. 


BUSINESS AND INVESTMENT INCOME

Rents from personal property. If you rent out personal property, such as
equipment or vehicles, how you report your income and expenses is generally
determined by:

 * Whether or not the rental activity is a business, and
 * Whether or not the rental activity is conducted for profit.

Generally, if your primary purpose is income or profit and you are involved in
the rental activity with continuity and regularity, your rental activity is a
business.  See Publication 535, Business Expenses, for details on deducting
expenses for both business and not-for-profit activities.


PARTNERSHIP INCOME

A partnership generally is not a taxable entity. The income, gains, losses,
deductions, and credits of a partnership are passed through to the partners
based on each partner's distributive share of these items. For more information,
refer to Publication 541.

Partner's distributive share.  Your distributive share of partnership income,
gains, losses, deductions, or credits generally is based on the partnership
agreement. You must report your distributive share of these items on your return
whether or not they actually are distributed to you. However, your distributive
share of the partnership losses is limited to the adjusted basis of your
partnership interest at the end of the partnership year in which the losses took
place.

Partnership return. Although a partnership generally pays no tax, it must file
an information return on Form 1065, U.S. Return of Partnership Income. This
shows the result of the partnership's operations for its tax year and the items
that must be passed through to the partners.


S CORPORATION INCOME

In general, an S corporation does not pay tax on its income. Instead, the
income, losses, deductions, and credits of the corporation are passed through to
the shareholders based on each shareholder's pro rata share. You must report
your share of these items on your return. Generally, the items passed through to
you will increase or decrease the basis of your S corporation stock as
appropriate.

S corporation return. An S corporation must file a return on Form 1120-S, U.S.
Income Tax Return for an S Corporation. This shows the results of the
corporation's operations for its tax year and the items of income, losses,
deductions, or credits that affect the shareholders' individual income tax
returns. For additional information, see the Instructions for Form 1120-SPDF.


ROYALTIES

Royalties from copyrights, patents, and oil, gas and mineral properties are
taxable as ordinary income. 

You generally report royalties in Part I of Schedule E (Form 1040 or Form
1040-SR), Supplemental Income and Loss.  However, if you hold an operating oil,
gas, or mineral interest or are in business as a self-employed writer, inventor,
artist, etc., report your income and expenses on Schedule C.

For additional information, refer to Publication 525, Taxable and Nontaxable
Income.


VIRTUAL CURRENCIES

The sale or other exchange of virtual currencies, or the use of virtual
currencies to pay for goods or services, or holding virtual currencies as an
investment, generally has tax consequences that could result in tax liability.
This guidance applies to individuals and businesses that use virtual currencies.


BARTERING 

Bartering is the exchange of goods or services. Usually there's no exchange of
cash. An example of bartering is a plumber exchanging plumbing services for the
dental services of a dentist. Bartering doesn't include arrangements that
provide solely for the informal exchange of similar services on a noncommercial
basis (for example, a babysitting cooperative run by neighborhood parents). You
must include in your income, at the time received, the fair market value of
property or services you receive in bartering. For additional information, refer
to Tax Topic 420, Bartering Income.


RELATED TOPIC

Operating a Business
Page Last Reviewed or Updated: 02-Nov-2023
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