Importance of Tax Compliance for Self-Employed Individuals
As a self-employed individual, you must file an annual tax return and pay estimated taxes quarterly. You need to pay self-employment tax plus income tax. Keep records of all business income and expenses. Report income and expenses on Schedule C and attach it to Form 1040.
If you have a net loss, you can use it to offset other income in the same tax year through sideways loss relief. This reduces taxes on your other income.
If you don’t file returns and pay taxes owed, you’ll face penalties and interest. The failure to file penalty is 5% per month of taxes owed, up to 25%. The failure to pay penalty is 0.5% per month up to 25% of taxes owed.
You must report at least six years of back returns to resolve noncompliance. Older returns lose some tax credits. Failing to report income risks prosecution and penalties.
Consequences of Not Reporting Income
What happens if you forget to report income?
Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
If you forgot to report income, you’ll likely need to file an amended return, and pay. If the 1099 income you forget to include on your return results in a substantial understatement of your tax bill, the penalty increases to 20 percent.
Not reporting self-employment income is a serious issue and a federal and state crime. This is a form of tax evasion. You will incur a fee on the amount not paid, interest will be charged on the amount not paid, and you may be arrested and sent to prison for failing to pay your taxes.
Self-Employment Tax Obligations
Do you have to pay self-employment tax if you didn’t make any money?