By Ashley Adams-Mott Updated October 19, 2018
If you are a "solopreneur" or freelancer, or you earn contract income for driving, delivering papers or any number of jobs, you must pay taxes on your self-employment income. Not reporting cash income or payments received for contract work can lead to hefty fines and penalties from the Internal Revenue Service on top of the tax bill you owe. Purposeful evasion can even land you in jail, so get your tax situation straightened out as soon as possible, even if you are years behind.
Reporting Self Employment Income Independently
Self-employment income you receive through contract payments needs to be claimed on your individual income tax return. In many instances – for example, a small business serving myriad customers, like a bakery or small store – you report the income to the IRS. Businesses, such as a sole proprietorship, file a business profit or loss tax return, form Schedule C. The profit or loss information from Schedule C is then transferred to your personal tax return as positive or negative income.
Income Reported by Buyers and Third Parties
If you provide services to a core group of regular customers throughout the year, such as business-to-business, a portion of your income data will be provided to you and the IRS by the purchasers of your service. For example, a freelancer will receive a 1099-MISC, or miscellaneous income, from many businesses that pay you more than $600 for goods or services in a tax year.
If you sell merchandise online using sites like eBay or Amazon, selling over $20,000 in goods will generate a 1099-K form reporting the dollar amount of your transactions through third parties. The IRS receives a copy of these forms when you do. If you do not claim this income when you prepare and submit your tax return, the IRS may contact you regarding the earnings or send a tax bill based on your estimated income.
Penalty for Not Reporting Income to the IRS
Small business owners are entitled to numerous tax deductions associated with operations. From costs of goods sold to car expenses and marketing costs, many expenses will reduce your taxable income. When you don't file your taxes and the IRS estimates a tax bill, your deductions are not included and penalties and interest are added. Penalties include amounts for failure to file and failure to pay. Failure to file fees max out at $205 after 60 days, while a maximum failure to pay penalty is 25 percent of the total you owe. Self-employment taxes due are included in your final tax bill and will be subject to the same penalties and interest.
Never Paid Taxes, Self Employed
If you have been self-employed for a period of time and have never paid taxes, you need to discuss your situation with a tax professional or attorney to receive the best advice. You must file six years of back returns to be considered in good standing with the IRS, but any returns older than three years lose eligibility for certain credits. When you file your returns, a tax bill you may not be able to afford can follow. If you can't pay your bill, you can set up a monthly payment arrangement with the IRS. Interest will be charged on the balance, and rates change quarterly. Charges compound daily on any unpaid balance of tax owed. As of October 2018, a 5 percent rate is in effect. If you owe a large balance, you may also attempt to negotiate a reduced total payment to bring your account current.
Forgot to File 1099
When you simply forgot to file a 1099 form while completing your income taxes, you can file an amended tax return with the IRS to correct the error. Tax form 1040-X amends individual income tax returns. Make the necessary changes, and attach any additional forms changing to the return, such as a Schedule C. You also need to attach the 1099 form if it is available.
FAQs
If you don't include taxable income on your return, it can lead to penalties and interest. The IRS may charge penalties and interest beginning from the date they think you owe the tax.
What happens if I don't report self-employment income? ›
Not reporting self-employment is deemed a federal and state felony and is a form of tax evasion. You may face a fee for the amount unpaid, interest charged, and even criminal prosecution. Self-employment income received through contract payments must be stated on your individual income tax return.
How does the IRS find out about unreported income? ›
The IRS receives information from third parties, such as employers and financial institutions. Using an automated system, the Automated Underreporter (AUR) function compares the information reported by third parties to the information reported on your return to identify potential discrepancies.
How does IRS verify self-employment income? ›
1099 Forms
The payer is responsible for filling this out and sending it to the IRS, as well as a copy for you to use as reference when filling out your own tax return. So if you don't have your tax return on hand, you can use 1099 forms to prove your income.
What happens if you didn't make enough to get a 1099? ›
If I didn't get a 1099-NEC or 1099-MISC, do I still need to report the income if it's less than $600? Yes. The IRS requires that you report all of your income, even if it's less than $600 and you didn't get a tax form for it. Follow these steps to enter your income.
What happens if I don't report my side hustle income? ›
Those 1099 forms are also submitted to the IRS. So if you ignore one and don't report the income, the IRS will generally flag your tax return. And if the IRS receives multiple 1099s that you don't report, the agency might get suspicious.
What if I forgot to report freelance income? ›
You must also amend your tax return if you forgot to report a taxable 1099 income. You need to file an amended return before the filing due date to resolve a potential tax liability and avoid penalties. However, make sure that the IRS processed your original return before filing the amendment.
Will I get audited if I don't report income? ›
While the odds of an audit have been low, the IRS may flag your return for several reasons, tax experts say. Some of the common audit red flags are excessive deductions or credits, unreported income, rounded numbers and more.
Does the IRS always catch unreported income? ›
More likely than not they will get to you. When you don't file taxes, IRS can come to you for back taxes anytime as there is NO statue of limitation for NOT filing. It is good to file to avoid the hassle of interest and penalties that will accrue for NOT filing on the tax liability.
What triggers an IRS investigation? ›
The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.
A 1099 form is best for accurate reports of income for the IRS. As a self-employed person, you'll get these forms from clients or businesses that pay for your services. Typically, these are only used for self-employed people, investors, contractors, and rental income.
How do I prove self-employment income without a 1099? ›
You can do this by using Form 1040 Schedule C. This form is for self-employment income and expenses. You will need to provide your Social Security number and the EIN of your business if you have one. Any income you earned from renting property, royalties, or other sources must be on the form.
How do I get the biggest tax refund when self-employed? ›
To get the biggest tax refund possible as a self-employed (or even a partly self-employed) individual, take advantage of all the deductions you have available to you. You need to pay self-employment tax to cover the portion of Social Security and Medicare taxes normally paid for by a wage or salaried worker's employer.
How far back does IRS audit go? ›
How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.
Do you have to report self-employment income under 600? ›
Yes. A common misconception or myth is that if you are paid less than $600 in a year, then you don't have to report this income on your tax return. The truth is that $600 is just the threshold for the employer providing a formal 1099-MISC form to you and to the IRS.
Is there a minimum amount for 1099 reporting? ›
Usually, anyone who was paid $600 or more in non-employment income should receive a 1099. However, there are many types of 1099s for different situations. Also, there are many exceptions to the $600 rule, meaning you may receive a 1099 even if you were paid less than $600 in non-employment income during the tax year.
Do I have to file taxes if I made less than $5000 self-employed? ›
So as long as you earned income, there is no minimum to file taxes in California.
How much self-employment income can I make without paying taxes? ›
You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.
Do I have to report self-employment income to IRS? ›
You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructionsPDF.
Can I avoid paying self-employment tax? ›
As an LLC, you can elect to be taxed as an S corporation. If you choose this option, you will not pay self-employment tax.
