If you get paid under the table, you file taxes by reporting that money as self-employment income on Schedule C, then calculating what you owe in Social Security and Medicare taxes on Schedule SE, and attaching both to a standard Form 1040. No W-2 or 1099 is required for any of this. Federal law defines gross income as “all income from whatever source derived,” which includes payment for work in any form.1Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined Cash, Venmo, Zelle, crypto, a check from a neighbor: all of it counts, and if you netted at least $400 from self-employment during the year, you’re required to file.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
You Still Have to Report It
This is the piece people get wrong most often. The assumption goes: no 1099, no paper trail, no problem. But your obligation to report income doesn’t depend on whether the person paying you filed anything. The IRS may not receive a matching document with your Social Security number on it, but that doesn’t remove the income from your return.
You also don’t need to wait for any form to show up before filing.3Internal Revenue Service. IRS Tax Tip 2003-25 – What to Do if You Haven’t Received a Form 1099 If you know what you earned, you can file.
The $400 Threshold That Triggers Filing
If your net self-employment earnings for the year hit $400 or more, you must file a federal return and pay self-employment tax, even if your total income is too low to owe any income tax.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That $400 figure catches a lot of people off guard. Income tax and self-employment tax are separate obligations, and the standard deduction doesn’t shield you from the self-employment tax piece.
Most states with an income tax also expect a return from residents with self-employment earnings. Rules vary, so check your state revenue department’s site.
The Forms You’ll Actually File
Three schedules feed into your Form 1040 when you’re reporting under-the-table pay as a contractor.
Schedule C is where the work happens. Part I is your gross receipts, and Part II is your business expenses. The number on line 31 is your net profit or loss for the year.4Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) If you have two genuinely different gigs (say, freelance design and house cleaning), file a separate Schedule C for each.
Schedule SE takes your net profit from Schedule C and calculates the self-employment tax you owe on it.5Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
Schedule 1 is the connector. Your Schedule C net profit lands on line 3, and the deduction for half of your self-employment tax goes in the adjustments section. Schedule 1’s totals then flow onto Form 1040.6Internal Revenue Service. 2025 Schedule C (Form 1040)
Tracking Income and Expenses When Nobody Sends You Paperwork
Because no employer or client is producing a form on your behalf, your own records are the entire evidentiary basis for both what you earned and what you deducted. Keep a running log of every payment with the date, who paid you, the amount, and a short description. A spreadsheet works. Accounting software works. Reconstructing a year of cash payments from memory in April does not.
Your taxable profit is gross income minus the ordinary and necessary expenses of your work. “Ordinary” means common in your line of work, “necessary” means helpful and appropriate. Typical deductions include supplies, advertising, insurance related to your business, software subscriptions, and continuing education directly tied to your trade.7Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business
If you drive for work, you can deduct mileage at the IRS standard rate of 72.5 cents per mile for 2026.8Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile You need a log with the date, destination, business purpose, and miles. The IRS is strict on this; an audit without a contemporaneous log usually means losing the deduction.
If you work from home, the home office deduction is available for a space you use exclusively and regularly as your main place of business. The simplified method pays $5 per square foot up to 300 square feet, capping at $1,500.9Internal Revenue Service. Publication 587 (2025), Business Use of Your Home The actual-expense method (a share of rent or mortgage interest, utilities, and insurance based on square footage) requires more bookkeeping but sometimes yields a bigger deduction.
How Self-Employment Tax Works
Self-employment tax is your Social Security and Medicare contribution. When you work a regular job, you and your employer split FICA. When you’re on your own, you pay both halves, which comes to 15.3% (12.4% Social Security plus 2.9% Medicare).2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
The rate doesn’t apply to every dollar of profit. You first multiply net earnings by 92.35%, then apply 15.3%. On $10,000 of net profit, only $9,235 is subject to the tax, which comes to about $1,413. This adjustment mirrors the fact that regular employers don’t pay FICA on their own share of the tax.
There’s a real benefit on the back end: you can deduct half of your self-employment tax when calculating adjusted gross income.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That doesn’t reduce the SE tax itself, but it lowers your income tax.
Quarterly Estimated Payments
Federal tax is pay-as-you-go. Regular employees have taxes pulled from every check, but with under-the-table pay, nothing is withheld, so the IRS expects you to send quarterly estimates yourself. You’re required to do this if you expect to owe at least $1,000 in combined income and self-employment tax for the year.10Internal Revenue Service. Estimated Taxes
For tax year 2026, the quarterly due dates are April 15, June 15, and September 15 of 2026, plus January 15, 2027.11Internal Revenue Service. Publication 509 (2026), Tax Calendars When a date lands on a weekend or holiday, it moves to the next business day. Use Form 1040-ES to figure the amounts.10Internal Revenue Service. Estimated Taxes
Wait until April to pay the whole thing and you’ll pick up an underpayment penalty. You can avoid it by paying at least 90% of what you owe for the current year or 100% of what you owed last year, whichever is less.12Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
If You’re Really an Employee, Not a Contractor
Some people paid off the books aren’t contractors at all: they’re employees whose employer is skipping payroll taxes. If someone controls when and how you work, provides your tools, and sets your hours, the IRS may treat you as an employee even if you’re being paid in cash. The agency looks at behavioral control, financial control, and the nature of the relationship, weighing the full picture rather than any single factor.13Internal Revenue Service. Employee (Common-Law Employee)
If you believe you’re misclassified, Form 8919 lets you pay only the employee share of Social Security and Medicare (7.65% instead of 15.3%) on wages where your employer didn’t withhold.14Internal Revenue Service. About Form 8919, Uncollected Social Security and Medicare Tax on Wages Filing it also credits those earnings to your Social Security record. To use Form 8919 you need a reason code, and a common one is that you’ve already filed Form SS-8 asking the IRS for a formal determination of your worker status.
This route puts your payer on the IRS’s radar, so it takes some resolve. But if you’re genuinely an employee, it roughly halves your self-employment tax and protects your future benefits.
Penalties for Not Filing or Not Paying
Ignoring under-the-table income stacks penalties from several directions at once.
Filing late costs 5% of the unpaid tax for each month or partial month, up to 25%.15Internal Revenue Service. Failure to File Penalty Paying late is a separate 0.5% per month on unpaid tax, also capped at 25%.16Internal Revenue Service. Failure to Pay Penalty Both run at the same time, with interest compounding daily on top.17Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
If the IRS finds you underreported, the accuracy-related penalty adds 20% of the underpayment attributable to negligence or disregard of the rules.18Internal Revenue Service. Accuracy-Related Penalty A $5,000 understatement produces $1,000 in accuracy penalties before interest starts.
Willful tax evasion is a felony carrying up to five years in prison and fines up to $100,000.19Office of the Law Revision Counsel. 26 U.S. Code 7201 – Attempt to Evade or Defeat Tax Willfully failing to file is a misdemeanor with up to one year in prison and fines up to $25,000.20Office of the Law Revision Counsel. 26 U.S. Code 7203 – Willful Failure to File Return, Supply Information, or Pay Tax Criminal prosecution is uncommon for small amounts but pursued aggressively where evasion is large or patterned. “Willfully” carries weight in both statutes: an honest mistake isn’t a crime, but hiding cash income deliberately is.
Catching Up on Past Years
If you’ve been paid under the table for years and never filed, the worst move is to keep waiting. The IRS Voluntary Disclosure Practice lets taxpayers come forward, report unreported income, resolve the debt, and generally avoid criminal prosecution.21IRS Criminal Investigation. Voluntary Disclosure Practice You’ll still owe the back taxes, interest, and civil penalties, but criminal charges are off the table.
The process starts by filing Form 14457 in two parts: a preclearance request to confirm eligibility, then the full application within 45 days. You’ll cooperate with a civil examiner, provide documentation, and either pay in full or set up an installment agreement. Disclosure isn’t valid once the IRS has already opened an investigation or audit, so the window closes if they get to you first. If this is your situation, bring in a tax professional.