For Individual Income Taxpayers:

For individual income taxpayers, income is taxable when received, even if it is not cashed or used right away. Even if it’s paid to someone else on your behalf, it is considered your income.

Businesses who use the Accounting Method: Cash Basis:

Two things happen when a business uses the Cash Basis accounting method. 1) the business reports and pays taxes on income received during that tax year, and 2) the business reports the expenses paid during that tax year.

Example Scenario: Assume the company’s fiscal year ends on December 31.

Summary: ABC Company bills a client for services in the amount of $1,200 on October 24, 2024, and a due date of November 24, 2024. An accounts receivable is created, and the total amount owed by the client is $1,200. The client makes a payment, including a late fee in the amount of $1,260 on January 22, 2025.

Tax is owed and paid; Tax year 2025

Reason: Even though the services were provided in 2024, and the client was billed in 2024, ABC Company doesn’t record the amount received until it is paid, therefore, the tax liability would fall in the tax year it is paid.

 

Businesses who use the Accounting Method: Accrual Basis:

For businesses who use the Accrual Basis accounting method, taxes are due for all income incurred for that period in the same tax year.

Example Scenario: We are going to use the same example as above. Assume the company’s fiscal year ends on December 31.

Summary: ABC Company bills a client for services in the amount of $1,200 on October 24, 2024, and a due date of November 24, 2024. An accounts receivable is created, and the total amount owed by the client is $1,200. The client makes a payment, including a late fee in the amount of $1,260 on January 22, 2025.

Tax is owed and paid; Tax year 2024.

Reason: Since the service was performed and billed in 2024, the income is considered incurred in 2024, making it taxable in that year, similarly to the individual taxpayer. Even if they don’t receive payment for the services until the following year, the taxes liability is when the income was incurred.