Accrued Revenue versus reported 1099-NEC compensation

[saidido912]

I offer drafting services part-time and have one major client. I use the accrual accounting method booking revenue on date of invoice. I file a Schedule C. My customer pays on 30 day terms. I had a very strong December 2022 but wasn't paid until January 2023. I still reported all calendar 2022 income (invoices) on my 2022 Schedule C. The 1099-NEC that I received from my client reported what they actually paid me in 2022. A figure less than I invoiced. I figured no problem and still reported 100% of my invoices.

Jump ahead to 2023. The 1099-NEC that I received this year includes income that I already reported in 2022. In fact, the 1099 figure exceeds my 2023 revenue (invoice) total.

How do I handle this difference? I certainly don't want to report December 2022 income a second time.

Thanks in advance.

[DianeW777]

It depends. Unless you specifically requested to file taxes on the accrual method, you are a cash basis taxpayer for the IRS.  The IRS makes this determination from the first return ever filed and remains the same unless an action is taken to change it. 

• IRS Publication 538

As a side note, per IRS tax law when inventory is required to be used on the accrual method (over $25M as of 2018) this does not change how income is reported for an IRS cash basis taxpayer.

Aside from exceptions noted: Income is taxed in the year received not when accrued. The right thing to do is to amend the 2022 tax return and include the income on your 2023 return. You do not have to wait to file 2023 with the correct information while you amend the 2022 return.

• Accessing a prior-year return
• How to amend (change or correct) a return already filed?
• What is the deadline for filing an amended return?
• How to file an amended return with the IRS

[saidido912]

First of all. Thank you for your response.

I don't believe that I formally requested an accounting method. I have been filing my Schedule C since 2018 with the Accrual Method box checked (line F). If that is a formal election, then I have. The 2023 tax year is the first year where a 1099 reported income exceeded calendar year invoices.

My drafting side hustle doesn't carry inventory and I only have a few expenses (supplies and mileage) and use of a small home office.

Will amending 2022 also require me to amend 2021 & 2020 as well?

[PatriciaV]

Yes, if you have filed a return with the accrual accounting box checked, you have formally requested to use that method for the life of your business (or until you request a change from the IRS).

Under the accrual method, you report income as it is invoiced. It doesn't appear you need to amend your 2022 return for income received in 2023 if the invoice was sent in 2022.

[Jimbo215462]

Hi - I am in the same boat as the original poster (e.g., my 2024 1099-NEC is higher than what I actually earned and my 2023 filing reflected higher earnings than my 2023 1099-NEC).  I am still unclear where I need to go in the software to reduce my earnings since I've already paid taxes on ~50% of it in 2023 and should not be taxed on it again.  Thank you.

[ThomasM125]

When you enter your sales, choose the category that says Income You Gave Back and set up a category called "adjustment to accrual basis" or some similar description and enter your adjustment amount to reduce the sales reported on your 1099 form to the correct amount.

@Jimbo215462 

[Jimbo215462]

Thank you @ThomasM125 !

I've gone through the steps twice and do not see this screen.  The only one that I see that is close is this one on expenses.  I've tried searching for Income You Gave Back and nothing is coming up.  Is this a business version of turbotax or something?

[RobertB4444]

No.  It's a category that you had to check earlier in the interview process.

You can enter it as an expense as well.  Just go to the "All Other Expenses" section and create an expense for 'Accrual Adjustment and reduce the amount that is on the 1099 to the correct amount.

@Jimbo215462 

[Jimbo215462]

Ok thank you!