Most business owners are familiar with reporting income generated from the service they provide or the products they sell. Interest and dividend income reporting is also common. However, the Internal Revenue Service (IRS) requires taxpayers to report all sorts of other income – even when it’s earned through illegal transactions. This is considered miscellaneous income and in most situations, it is considered taxable.
Bartering — where money is not exchanged — is an example of miscellaneous income. The fair market value of the service or property received is reported to the IRS and considered income. For example, Joe’s Deli needed the inside of the business painted. A regular customer of the deli operated a painting business, Paintastic, so they decided to barter. Joe traded $400 worth of food for Paintastic’s holiday party, and in return received $400 worth of paint and painting services. Each business in this example would have to report $400 of miscellaneous income on their tax returns, even though money was never exchanged.
Other examples of miscellaneous income include certain proceeds from life insurance policies, recoveries (refunds, rebates, reimbursements), jury duty earnings, alimony (but not child support), survivor benefits paid by an employer upon the death of an employee, prizes & awards, some forms of unemployment benefits, and whistle-blower awards from the IRS.
Taxpayers who host direct sales parties are sometimes given thank-you gifts for hosting the event. The fair market value of such gifts is also reportable as miscellaneous income.
The IRS even wants taxpayers to report miscellaneous income earned by questionable means, such as from bribes, gambling proceeds, kickbacks, so called under-the-table transactions, amount of funds embezzled and the fair market value of stolen property.
This list of reportable income is extensive. When in doubt, business owners should refer to IRS Publication 525, Taxable and Non-Taxable Income to determine if the money, property, or services received are considered miscellaneous income.