You get paid before you work. A couple signs in October, wires a deposit in November, and the wedding is next June. In that gap between the money arriving and the work getting done, you can overpay tax, misstate your books, or both. The fix is mostly contract wording and bookkeeping, and it costs little to fix before December 31st.

Deposits are taxed when the money lands

Many small planning firms use the cash method. On cash, you're taxed on income when you receive it. A deposit for a 2027 event that hits your account in December 2026 is 2026 income, even though the work, the vendor bills, and the risk of cancellation all fall in 2027.

- Deposits often pile up in the fourth quarter, when a lot of next year's events get booked.
- Expenses come a year later. You pay the venue balance, florist, rentals, and day-of staff in the year of the event.
- So the tax comes early. You pay tax on profit you haven't made yet, because the income lands in one year and the costs in the next.

Example: You collect $90,000 in deposits from October through December 2026 for events in 2027. On cash, all $90,000 is 2026 income. At an assumed 30% combined income and self-employment rate, that's about $27,000 of tax on events you haven't held yet. You don't get to deduct the vendor costs until a year later.

Three kinds of "deposit," three tax results

Calling it a "deposit" on the invoice doesn't decide how it's taxed. Your contract does.

- Refundable security deposit: If you truly have to give the money back, like a damage deposit returned after the event, it generally isn't income when you receive it. The test is whether you have complete control over the money (Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990)). Keep these deposits separate and book them as a liability.
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- Advance payment for your services: A retainer or booking fee that goes toward your own fee is an advance payment. On cash, it's taxed when you receive it. On accrual, you may be able to defer it, as explained below.
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- Client money you pass through to vendors: If you collect the full event budget and pay the venue and caterer yourself, and the contract and the bank trail show you buying those services and reselling them, the full amount is your gross receipts and the vendor payments are your expenses. If the contract makes you the client's paying agent and you hold that money in a separate account, those funds may not be your income. That depends on the contract and the facts, so have your preparer review it. Either way, card processors report the gross on Form 1099-K, so your return has to reconcile to that number.

Accrual can defer a deposit one year, but not forever

On the accrual method, you can elect to defer advance payments under §451(c) and Reg. §1.451-8. A firm without audited financial statements reports the part earned in the year of receipt, then the rest the next year.

- One year at most: A deposit received in November 2026 for an October 2028 event is fully taxed by 2027, a year before the event happens.
- Your books have to show what you've earned, event by event. One "Deposits" account with no event detail won't support a deferral.

Switching from cash to accrual is generally an automatic method change on Form 3115 under Rev. Proc. 2025-23, with a §481(a) adjustment that catches up the difference between the two methods. Your preparer confirms you're eligible and which change number to use. The switch also changes how you handle payables, receivables, and prepaid expenses, so it's about more than deposits. You can stay on cash while your average gross receipts are at or under $31 million for 2025 tax years, or $32 million for 2026 (Rev. Proc. 2025-32). Being allowed to stay on cash doesn't mean cash is cheaper for you.

Cancellations and refunds

- Forfeited deposits: When a client cancels and forfeits a refundable deposit, it becomes income once the contract gives you the right to keep it.
- Refunds of deposits already taxed: If you were taxed on a deposit in 2026 and refunded it in 2027, you generally deduct the refund in 2027 rather than amending 2026. A refund over $3,000 may qualify for §1341 relief, so ask your preparer. Track refunds by event so none get missed.

Vendor 1099s changed for 2026

You pay a lot of individuals, like DJs, photographers, florists, officiants, and day-of coordinators. For services paid in 2026, you file Form 1099-NEC only when a payee gets $2,000 or more, up from $600 for 2025 payments. That threshold gets an inflation adjustment starting in 2027. Payments by credit card or through a network like PayPal are reported by the processor on Form 1099-K, not by you. Form 1099-NEC is due January 31st.

What to do before December 31st

1. Rewrite your contract template: Spell out what's a refundable security deposit, what's a nonrefundable retainer, and what's vendor pass-through money. That wording decides the tax result, and fixing it for new bookings costs nothing.
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2. Split your deposit account: Set up three liability accounts (security deposits, client advances, and vendor money held), and tag every receipt with the event and its date. It takes about an afternoon, and every option below depends on it.
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3. Run a year-end deposit schedule: List every 2026 deposit for an event after 2026. That shows how much income you're pulling forward and what a method change could be worth.
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4. Collect W-9s at booking: Get one from every individual or LLC vendor before you pay them the first time, and note whether you pay by check, ACH, or card. By January 31st, it's too late to chase a DJ for a taxpayer ID.
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5. Decide on your method using real numbers: If deposits for future events are large and come every year, have your preparer compare accrual with the one-year deferral against the cost of switching and of accrual bookkeeping. If your deposits are small, stay on cash and manage timing through your contracts and the deposit schedule.

The tradeoff

Cash is simple and nearly every planner is allowed to use it. The cost is paying tax on money a year before you earn it. Accrual with deferral matches income more closely to the year of the event, but it takes records for every event, a Form 3115, and accrual treatment for the rest of your books. Neither one fixes a contract that calls everything a "deposit," so fix the contract first.

If your deposit account is one number with no event detail, or you're not sure what your contract says about refunds, book a 30-minute Tax Leak Review (https://cal.com/mister-moneysleeves/tax-leak-review), and we'll go through it before year-end.

Tristan D. Taylor, EA
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​tristandtaylor.com​