I didn’t get paid. Can I deduct it on my taxes?

February 7th, 2023 → 10:16 am @ Carol

I didn’t get paid. Can I deduct it on my taxes?

Usually, not getting paid is not a tax deduction, because we Americans are taxed on our income.

No income, no tax to pay.

But I follow your thinking: you did the work and got stiffed…isn’t there any recourse?

Naturally there is small claims court, which might work if you had a contract. But for most authors, there is no tax deduction for not getting paid, even when you did the work. Bummer.

There is one exception to the rule: If you already claimed income on your tax return in a prior year, you can claim a tax deduction for it when the money becomes uncollectible.

Claiming income before you receive it is not typically done by writers or bloggers; most use a cash-basis accounting system. In a cash-basis system, you claim it as income when it comes in and not before.

But some writers or bloggers that use what accountants call, accrual accounting; they count their income when it is earned, even if they are paid later (or never). If you use accrual accounting (if you’re not sure, ask your accountant or tax preparer) and you previously claimed the income when it was earned, then you can deduct the income in the following year when you determine it has become uncollectible.

For example,  Mike bills customers as he completes each phase of a project and uses accrual accounting (remember that’s very rare for writers, bloggers or any freelancer to use accrual accounting). He billed Customer A in December 2022 for $2,000 for work he had completed as of December 31, 2022. Mike reported the $2,000 as income on 2022 his tax return even though he hadn’t bee paid, but he had earned it. Customer A never paid, but it took until June of the following year for Mike to finally give up trying to collect. When Mike prepares his 2023 tax return, he can claim a deduction of $2,000 (called bad debt expense in accounting lingo), for the uncollectible debt he is owed.

Bill was also stiffed by Customer A in 2022, but since he uses a cash basis accounting (which is more common), he never claimed the income on his 2022 tax return because he never received it. He has no bad debt expense to take as a tax deduction.

Both writers are out the $2,000 and their recourse is small claims court, not their tax return.

Other helpful business tips can be found in my book, Business Tips and Taxes for Writers

 

Carol Topp, CPA

Tags: cash basis, freelancer, IRS, tax, tax deduction, writer