CASH METHOD

With cash method your revenue is recorded when you receive it in your hand, your mailbox or in your bank account. Once you possess it, you record revenue and that is the year in which you owe tax on the revenue. It does not matter when it was sent to you or the date on the check, it is revenue to you when you receive it.

You record expenses when you pay them, with a few exceptions. If you are making a current purchase or paying a current bill that is an expenses when you pay it. You cannot prepay years worth of rent, for example and record all of it at the time you pay. If you are prepaying several years worth of expenses let your accountant know in order to get the proper expense recorded in the proper period. Generally each year will have no more than 12 months worth of monthly expenses.

ACCRUAL METHOD

Accrual method is more complex and usually requires an accountant to manage. With the accrual method, revenue is recorded when you earn it. If you do not collect the payment at the time of service, you record both the revenue and a receivable, to show that you are owed the money. Once you collect the payment, you are no longer owed the money and so your receivable goes down. 

Expenses are recorded when you incur them, regardless of when you pay them. If you do not make the payment at the same time you incur the expense, you record a liability to show you owe someone. When you pay them the liability goes down and so does your cash, but the expense has already been recorded.

EXAMPLES

You provide a service to a client or customer on April 30th. Your client pays you on June 15th. Using the accrual method you record the revenue on April 30th. Under the cash method you record the revenue on June 15th.

You decide to attend a conference that will occur on November 1st, and you pay in advance on May 10th. Using the accrual method your expense is not recorded when it's paid, it is an expense to you in November. Under the cash method, you record the expense when you pay it in May. 

If you have been in business a while and are not sure what accounting method you choose, you can look at your prior year tax return to see what method was checked.

• Sole proprietor or LLC check schedule C, Line F.
• Partnership check Form 1065, Line H.
• S-Corp check Form 1120-S, Schedule B, Line 1.

Under the cash method of accounting you record revenue when you get the money, either in your hand, your mailbox or in your bank. The date you had the opportunity to deposit it, or the date someone else deposited it, is the date you effectively received it.

The accrual method of accounting has you record income when you earn it. For clinicians this is the date of the session, when services were provided.

If you are using the cash method of accounting it is important to determine when you received the check. That is the year it will be revenue for you. The following examples all use cash method accounting. If you are using accrual, contact your accountant.

EXAMPLE 1: You receive a check dated 12/31/2023 and it was delivered to you by mail on 1/6/2024. It is 2024 revenue for you. You could not have put your hands on it in 2023, so it counts for 2024 revenue.

EXAMPLE 2: You had several appointments the last few days of 2023. Your Square deposit was made to your account on 1/2/2024. This counts as 2024 revenue because that is the date it was deposited by Square.

EXAMPLE 3: You took vacation around the holidays. You arrive to your office on 1/2/2024 and find a check dated 12/13/2023. You are certain that it was delivered to you before the end of 2023 but you were not in the office to retrieve it. Since you believe it arrived in 2023, it is 2023 revenue to you. That is when you had the ability to deposit it, even though you did not pick it up until 2024. 

But what if I receive a 1099-MISC for 2022 that includes amounts I recorded as 2023 revenue?

The IRS knows that there are timing differences and differences in accounting methods that will cause many 1099-MISC or 1099-NEC forms do not match reported revenue. There is no way to match your accounting records to every other company who you do business with. There are two options when this happens.

Option 1: If the difference is small or the total of all your 1099 forms received is less than your reported revenue, there should not be a problem. Accurately report your total revenue and the IRS will see that is higher than all your 1099's.

Option 2: You can report the amount on the 1099 form on your tax return as your revenue and then record an adjustment as an expense item to reverse it, with the description: "2023 revenue included on the 2022 form 1099." That will alert the IRS to the fact that the difference was recorded as 2023 revenue. Then make sure you report that revenue on your 2023 taxes.

Either way, if the IRS does inquire, as long as you are properly reporting all your income in the correct period you will be able to show your taxes were accurately filed.