The Consultant Tax Trap
When does a consultant actually report income? The timing of cash flow often creates a tax trap. If you complete a project in December but receive payment in January, which tax year does that income belong to? The either/or dilemma is between following the cash flow (simple) and following the earned date (formal). A Sound decision requires clarity on the rules.
This example highlights the core difference between the two systems. Under the Cash Method, the income is reported in the new year because that is the year you received the payment. Under the Accrual Method, you must report the income in the previous year because that is when you earned it, regardless of when you were paid. Understanding this timing difference is a Sound foundational step for your business's financial accuracy.
Ready to simplify your bookkeeping and choose the right method for your business from day one? Read more on this topic by visiting https://www.safesimplesound.com/guide-to-business-accounting-methods-cash-vs-accrual/.
DISCLAIMER: This content is for educational purposes only and should not be considered personalized financial advice. Always consult with a qualified financial professional before making financial decisions.