The IRS collects more than $2 trillion in tax revenue each year. Despite this massive sum of money, the IRS will at some point notice if you do not report your own income to the government.
It may be even more tempting to hold off reporting your earnings if you are self-employed. However, before you decide not to claim your income, you should know why it is important that you self report and file a return every year.
Self-Employment and Self-Reporting
People who work as employees arguably have an easier time reporting their income each year. Their employers withhold taxes for them and relieve them of the responsibility of notifying the IRS about their earnings.
People who are self-employed, however, must take care of withholding taxes and reporting their incomes on their own. Individuals who need to self-report include:
- Valets
- Waitresses and servers who receive cash tips or commissions
- Small business owners like restaurateurs and clothing shop owners
- Car dealerships
- People who work from home like freelance writers, bloggers, and cosmetic sales professionals
If they earn incomes over $600 a year, they will typically receive a 1099 from the company or individuals for whom they contract. They should use this form to report their monies and file a return.
Filing a return gives self-employed individuals a chance to pay into obligatory funds like:
- Medicare
- Social Security
- Sales tax
- State tax
Paying into Social Security and Medicare can be particularly important for people who plan to draw on those funds at some point in the future. Failure to pay these taxes could exempt them from receiving these benefits when they are older.
People who work as independent contractors or those who receive cash payments can report their money by filling out a Schedule C and submitting it with their return. People who are partners in an multi-ownership LLC should file IRS Form 1065. If the LLC is a corporation, owners should file IRS Form 1120.
Failure to Self-Report
Self-employed individuals may be tempted to assume that the IRS will not notice if they fail to report their incomes. After all, what difference could a few thousand dollars make when the IRS already collects more than $2 trillion in tax revenue?
It is true that the IRS may not notice right away that you failed to report your income. However, it receives the same tax forms as you, meaning that if you receive a 1099 from your clients the IRS likewise receives that same form on your behalf. Agents will come across this information at some point and look to you for an explanation.
Further, failure to self-report and pay the taxes that you owe could result in serious financial and legal punishments like:
- a tax audit
- monetary fines
- wage garnishments
- bank and asset levies
- jail time
Once these punishments are underway, it can be nearly impossible to escape or minimize them.
If you have failed to self-report and pay taxes that you owe the IRS, it is important that you know what steps to take to correct this serious situation. You should rely on a tax professional who knows the U.S. tax codes and can act as an advocate for you as you approach the IRS.
Your tax pro can help you by:
- filing past due returns
- guiding you in paying owed taxes
- help you defray penalties like fines
- negotiate so that IRS does not garnish your income or levy your assets
You stand a better chance of getting the IRS to listen to and deal with you fairly when you have a competent tax professional by your side.
People who are self-employed or receive cash payments as income are obligated to report their earnings and pay their taxes each year. You can benefit by understanding why it is important for you to report all of your income to the IRS.
