When you’re self-employed, one of your most important responsibilities is filing taxes. Unfortunately, many people get behind because of the required quarterly payments on top of filing an annual tax return.
The IRS announced at the beginning of 2024 that it was ramping up its tax enforcement efforts, particularly with high-income individuals, large corporations, and complex partnerships. Many self-employed people fit into this category, so it’s important to know what to do to get caught up on your unpaid taxes and unfiled tax returns. You may have received Notice CP59, which the IRS sends out if they have no record of your filed tax return for the prior year.
The consequences of not filing your taxes are many, including IRS penalties and interest, collection actions, and even seizure of property. This guide walks through what to know about self-employment and taxes, what happens if you don’t report your income and other important information for your taxes.
Understanding Self-Employment and Your Tax Obligations
Self-employment can take many forms. Some decide to start up a business in their community, and some are more like freelancers who work project-to-project.
Each type of self-employment situation is different, but each is separate from the obligations of a traditional or “regular” employee, who receives a W-2 from their employer and has taxes withdrawn from their paychecks by the company. Self-employed workers essentially work for themselves, so they are in charge of meeting their tax obligations.
Some self-employed people receive 1099’s as independent contractors, while some don’t, including people with small businesses who accept cash and checks from clients throughout the year. But whether you receive a document or not, you must report all of your income to the IRS.
As a self-employed person, you’re required to file a tax return if you have more than $400 in self-employment income after expenses. You must also provide the IRS with details about your revenue and expenses. You don’t just report profits.
Quarterly Estimated Tax Payments
On top of that, most self-employed people must pay quarterly estimated taxes. Typically, you don’t have to pay quarterly taxes your first year in business, but after that, you must pay 100% of the current year’s tax or 90% of the previous year’s tax, or you can face penalties.
These quarterly taxes must be submitted four times per year. If these dates fall on holidays or weekends, the due date will be shifted to the next weekday:
- April 15
- June 15
- September 15
- January 15
So, how do you pay taxes if you’re self-employed? You can base your payments on last year’s tax liability. For instance, if you owed $4,000 last year, you should pay $1,000 per quarter this year. Alternatively, you can estimate your quarterly payments based on the income you made in that period and the tax rate for your tax bracket (which, for people with higher incomes, will likely be 32% or higher).
In addition to income tax, you also must account for self-employment tax, which is 15.3% for 2024: 12.4% for Social Security and 2.9% for Medicare. These taxes are withdrawn from W-2 employees’ paychecks by their employers, but the self-employed have to do it themselves. Additionally, when you work for an employer, you only pay 6.2% for Social Security and 1.45% for Medicare out of your wages, and then, your employer pays a matching amount. As a self-employed person, you pay for everything.
Calculate your quarterly estimated tax payments with these rates for 2024, and don’t forget to submit by the applicable tax deadlines.
Reasons for Not Filing Taxes as a Self-Employed Individual
Many self-employed people have unfiled taxes. The IRS has billions of dollars in back taxes, and millions of Americans haven’t paid what they owe. With over 16 million Americans being self-employed, there’s a lot of overlap, especially because these workers are on their own for taxes much more than traditional employees.
So, what are the key reasons you might be self-employed and have unfiled taxes? Here are a few common ones:
Lack of Understanding
Many self-employed people, especially those newer to this type of work, simply may not understand their tax obligations. Perhaps they previously worked for an employer, so they’re unaware that self-employed people must be more organized and responsible to ensure compliance.
Financial Trouble
This may be the most common reason people fail to pay taxes. Some people just can’t afford their tax bill, which may come from cash flow problems with their business, failure to prepare properly throughout the year, or financial hardship.
Procrastinating
Much of the workforce would identify as procrastinators. It’s easy to put off responsibilities, especially those that are unpleasant, like paying taxes. Unfortunately, being self-employed requires a bit more planning than other career paths, and being proactive is key to tax compliance.
Psychological and Emotional Factors
Often overlooked reasons for being self-employed and never filing taxes are psychological and emotional factors. People have many thoughts, feelings, assumptions, and judgments about finances, particularly taxes.
Self-employed people may feel completely overwhelmed by the filing process, or they may have an intense fear of owing money to the IRS. These factors are enormous for taxpayers, as they’re often unconscious, but emotions run high when it comes to paying taxes.
Poor Recordkeeping Practices
Finally, many self-employed people and business owners may not have the best practices for organizing their records. This makes it very difficult to meet tax deadlines properly and report income and expenses.
Consequences of Not Filing Taxes
The IRS issues several kinds of penalties for unfiled and unpaid taxes. For self-employed individuals, it may come as a surprise when they miss a quarterly tax deadline and are then charged a penalty fee when filing their annual return.
So, what happens if you don’t report income and are self-employed? Here are the three main categories of consequences to know:
- Legal trouble: It is technically a legal penalty when the IRS issues a fee and interest for an unfiled return or missed payment. These are usually civil penalties, but they can build up fast. If you continue to fail to pay your tax bill, the IRS may eventually take other legal actions against you, such as criminal penalties and even asset seizure or levies, to pay for your tax bill.
- Financial impact: Paying taxes on its own is already stressful, and you may owe a lot of money. You don’t want to add to your balance with fines and building interest that you could avoid. This could put you in a situation where you continue to build significant tax debt.
- Long-term consequences: Aside from the hits to your finances and potential legal consequences, failing to file or pay could also mean you won’t be able to get approval for loans in the future, and your credit situation could see long-term impacts.
All of these consequences don’t account for the extra time and effort spent dealing with potential IRS audits when they suspect you underreported your business income. You never want to have to deal with a business tax audit or any of these potentially damaging consequences.
If you’re self-employed and have never filed your taxes, talk to a tax professional today to discuss your options and learn how to move forward.
How to Resolve Unfiled Taxes
The good news is that acting quickly can help you get out of tax trouble. If you’ve never filed taxes, here are a few steps to take immediately:
Get Organized
You first need to know exactly what you owe. Gather information about your business finances for any years you haven’t filed or paid taxes. Find any old paperwork that applies, and perform retroactive bookkeeping tasks, like running reports for past years. You’ll need to get everything organized and accurate so you can move forward.
File Past-Due Tax Returns
The most effective way to get out of tax trouble is to file your unfiled returns and pay what you owe as soon as possible. Make sure you file returns for all years you were in business and received income as a self-employed individual.
Contact the IRS
If you have questions about your responsibility or about any notices or penalties you’ve received, contact the IRS right away. It’s always better to be in contact with the agency instead of trying to ignore notices or fines they impose on you. They will usually be willing to work out a situation with you where you can pay off your tax debt. It’s crucial to remember that the individuals you speak with at the IRS are focused on the agency’s best interest, which may not necessarily align with your own. Therefore, it’s essential to fully understand your options and consider seeking tax counsel before engaging with the IRS.
Understand Penalties
It’s helpful to understand the penalties you’ll likely face with unfiled tax returns. Here are common penalties:
- Failure to file: The IRS issues this penalty if you don’t file your return by the deadline for the applicable year. This penalty is 5% of your unpaid taxes for every month that the return is late, not to exceed 25% of the balance.
- Failure to pay: This penalty is 0.5% of your unpaid taxes for every month that the tax is unpaid, not to exceed 25% of the balance.
- Information return: Some people may think they don’t have to file a tax return if they don’t owe money. However, the IRS still requires an information return for many businesses, and you’ll be hit with a flat fee penalty (between $60 and $630) if you fail to file an information return.
Minimize Penalties Where Possible
You can apply for penalty relief, especially if you have a good track record with the IRS. First-time penalty abatement is an option if you have a history of compliance, which generally means you’ve filed your return for the last three years and didn’t receive any penalties.
You may also have options if you received a penalty notice you believe was issued in error. You can appeal and provide evidence to the IRS to show you complied.
Set Up a Payment Plan
You may also be able to apply for a payment plan with the IRS, where you agree to an installment agreement and pay off your debt monthly over a set period of time. This is a good option if you owe $50,000 or less for long-term plans and $100,000 or less for short-term plans.
Negotiate an Offer in Compromise
Alternatively, you could respond to the IRS with an offer in compromise, which is an amount less than you owe but the highest amount you can pay under your financial circumstances. If the IRS sees that the offer is all they can reasonably expect to collect from you, they may agree to settle your debt with you.
Seek Professional Help
It’s always a good idea to talk through your options with a tax attorney if you’re self-employed and never filed taxes. The situation may not be anything to panic about, but the longer you wait to file and pay, the worse the situation will get. Talk to a professional as soon as you receive a notice or penalty from the IRS.
Preventative Measures for the Future
Needless to say, you want to stay in tax compliance once you address your current issues with the IRS. Here are a few strategies for preventing this from happening in the future:
- Stay organized: Revamp your recordkeeping practices so you can easily run reports throughout the year, understand your cash flow, and have a method in place for meeting tax deadlines.
- Follow tax news: Tax law changes frequently, and each year may bring new guidelines for self-employed individuals related to allowable deductions, credits, and general tax procedures. Stay up to date on these laws to stay compliant.
- Work with a tax professional: Work with an expert who understands your obligations and can help you with the most complex tax challenges. This is important as a self-employed person because you don’t have that employer assistance when paying taxes, and you may easily miss something.
Stay ahead of your taxes by being diligent and establishing better business and financial processes.
Work with a Tax Expert to Avoid Problems
Tax problems are some of the easiest financial issues to avoid, as long as you stay proactive, understand your obligations as a self-employed worker, and never underreport income or overreport deductions.
Working with a tax attorney who can be by your side through tax issues is always a good idea, especially when you are a high earner and the IRS may be taking a closer look at your information.
Contact Wiggam Law today to learn more about how we can help.
Self-Employment Taxes FAQs
What happens if a self-employed person never files taxes?
You will continue to build up tax penalties and interest. The IRS may audit your business, and the agency may eventually take legal action against you.
Can I file self-employment without a 1099?
Yes, you can file your self-employment taxes without a 1099. You must report any income you received throughout the year to the IRS on your tax return.
Can self-employed individuals face criminal charges for not filing taxes?
Although criminal penalties are rare, the IRS may eventually issue criminal penalties against you if you fail to file, and you also may face jail time if your crimes were willful.
How does the IRS track unfiled taxes for self-employed individuals?
The IRS has a few ways to track and monitor for underreported income. For instance, if you receive income from a client as a contractor, and that contractor sends a 1099 to the IRS, the IRS will have a record of that income.
What are the options for paying back taxes if I’m self-employed and haven’t filed in years?
Pay attention to any notices you have received from the IRS, and follow the instructions they provide closely. Go through your previous records to determine what you need to pay for unfiled tax years, and file and pay immediately.
Can I be charged with tax evasion if self-employed?
Tax evasion charges may apply to self-employed people, especially high earners if your actions were willful. You may face civil and criminal penalties for tax evasion.