It’s every freelancer’s nightmare – when a client suddenly disappears after the goods have been delivered. You find a client, and you strike a deal. At the agreed time, you turn in your deliverables. Your client – and the money due you – is nowhere to be found.
If you’re dealing with a person face to face, it might be easier to follow up on the payment. If you’re dealing purely via the Internet, it will be much more complicated. Worst case scenario – you do not get paid for your work. While this hasn’t happened to me yet, I am very much aware that it could happen. Indeed, maybe it has happened to some of you.
How does this affect your taxes? Can you write it off as a business loss?
The answer depends on how you declare your income. There are two options – the accrual method of accounting and the cash method of accounting. The former method means that you report your earnings even if you haven’t received the money yet. Let’s say you got a job order right before you report your taxes. You will be receiving an X amount of dollars for the job order, but not till a few weeks later. Using the accrual method, this amount is already part of your earnings even if you do not have the cash with you. The cash method is pretty straightforward as well – you only report whatever cash you have actually received for your work.
The good news is that according to IRS Publication 535, if you use the accrual method of accounting, you can write off unpaid invoices as a business loss. However, if you use the cash method of accounting, this does not apply.