Tax Questions

What Does It Mean to Realize Income?

Some people think that if there had not received income or have not been paid, then they would not have to report that amount to the IRS. However, these may not be the case every time. According to the IRS, once you have done everything needed to complete the job and the payment is available, even though you have not received it in your hand, the income is considered to have been realized and will be included for tax purposes.

what does it mean to realize income

For example, somebody asked you to do a job and promised to pay you on the day you finished.

However, when you have done the job, payment is delayed for some reasons. Even if, it takes your client a month to pay you, instead of the day you've finished a job like he promised, the income is considered realized on the day you've finished the job.

You will then need to report that income you have not received to the IRS for tax purposes.

There are people that ask to be paid in January instead of December so that they will not have to include that payment for tax purposes. The problem is, even though you do not have the money in your hands till January of the following year, the income is considered a realized and available to you in December. That means, the IRS will want to know about it and will want to include it when calculating your tax liabilities.

If you are audited, the IRS auditor will recalculate your tax liabilities including that income if you did not include it on your tax return. If the IRS auditor finds some income that you delayed so that you would not have to pay taxes, there will also be penalties and interests added to your tax liabilities.