For freelancers or categories of people that earn their income from delivering papers or other jobs, it is vital to pay self-employment taxes. You could be subjected to huge fines from Uncle Sam if you fail to report cash income or payments. This fine is in addition to the bills you owe.
If you deliberately evade tax, you can be incarcerated. With this in mind, even if you are years behind, get your tax straightened out as soon as you can
All income you got through self employment and other contract jobs should be claimed on your income tax. For instance, a small business serving series of customers like a small store or a school needs to report the income to the IRS. For sole proprietorship, they will have to file their business profit or loss tax returns via form Schedule C.
If your services in a year are to a core group of a regular customer, you and the IRS will have access to a part of your income data. This will be made available by the people you serve. For instance, if any client pays you more than $600 for goods and services in a tax year as a freelancer, you will receive a 1099-MISC or miscellaneous income.
For people selling online with eCommerce giants like Amazon or Alibaba, a sale of more than $20,000 will trigger a 1099-K form. This is to report the amount you get via third parties. The IRS also has access to this form. As a result, failure to claim or report this income could trigger an investigation from the IRS.
There are many tax deductions that small businesses qualify for. Expenses that reduce your taxable income ranges from marketing cost to the cost of goods sold. When you do not file your tax and the IRS estimates a bill, you will incur penalties and interest. You will be penalized for failing to pay and fine.
After 60 days, failure to file could amount to a fine of $205. If you fail to pay as well, the penalty is 25% of the amount you owe.
If you are self-employed and never paid the tax, you should discuss this with a tax professional. For you to avoid any issues with the IRS, be sure to file six years back. Should you, however, have any return older than three years, it loses eligibility for some credit.
In filing your return, it could trigger an excessive tax bill. If you will not be able to pay the tax bill, the best bet is to have a monthly payment schedule with the IRS. The rate changes every quarter, and interest will be applied on balance.
There are cases in which you could simply forget to file a 1099. If this happens while completing your income tax, all you need do is present the amended tax return with the IRS. With a tax form 1040-X, you can modify this error. Be sure to make the changes, attach any other form changing like Schedule C. If you have form 1099, you should attach it.
There is an accuracy related penalty if you do not report the correct amount of income on your tax return. Also, if you substantially understate your income tax, you will have to face the same penalty, which is equal to 20% of the underpayment.
According to the IRS, you have a substantial understatement if it is more than 10% of the right tax or $5,000, whichever is higher. There are cases, however, in which the IRS might not impose the penalty like when you show reasonable cause that has to do with the discrepancy.
It is illegal to report less income than you actually received deliberately. You will be charged with having the intent to defraud the IRS and the government if you deliberately chose not to report your income. While not reporting your income or under reporting your income might reduce your tax liability, you have a lot to lose later as it might warrant legal action.
Premier Accounting & Tax