How should Dorothy report her income as a cash basis taxpayer and self-employed guitar instructor in 2021?
As a cash basis taxpayer, Dorothy should include the $11,700 income from 156 guitar lessons given in 2021 as part of her taxable income for the year.
Understanding Cash Basis Taxpayers
Cash Basis Taxpayer: A cash basis taxpayer is someone who reports their income when it is actually received, not when it is earned or invoiced. This method is commonly used by self-employed individuals and small businesses.
Dorothy's Income Reporting
As a self-employed guitar instructor, Dorothy is considered a cash basis taxpayer. This means that she recognizes income when it is received, rather than when it is earned. In 2021, Dorothy provided 156 guitar lessons, generating $11,700 in income.
Income Inclusions: The $11,700 received from the 156 guitar lessons given in 2021 should be included in Dorothy's taxable income for that year. This amount represents the income she actually received during the tax year.
Payment for Future Services
Dorothy also received a $375 payment for five guitar lessons scheduled to take place in January 2022. Since Dorothy operates on a cash basis, this payment should not be included in her taxable income for 2021. Instead, she will report this income in 2022 when the services are provided.
Accuracy in Income Reporting
It is crucial for self-employed individuals like Dorothy to accurately report their income in the appropriate tax year. By following the cash basis method, Dorothy ensures that her taxable income reflects the earnings she actually received during the year.
In conclusion, Dorothy should include the $11,700 income from guitar lessons given in 2021 as part of her taxable income for the year. The $375 payment for future services should be reported in the year she actually receives it, which is 2022. This approach ensures accurate income reporting for self-employed individuals operating on a cash basis.