Running a freelance business provides significant flexibility and independence, however these benefits to not extend to your taxes. In fact, if you have any unfiled tax returns, it is imperative that you take action now to file them or risk the IRS fines and penalties which may be assessed.
Why the urgent call to file your freelance back taxes? It is because the IRS has intensified its enforcement efforts. They have already raised $172 million from increased enforcement and they are going to go for more dollars through these initiatives.
Here is why filing unfiled tax returns is essential for freelancers, especially now:
1. Avoiding Penalties and Legal Consequences.
Failing to file tax returns can lead to severe penalties and legal issues. The IRS imposes both failure-to-file and failure-to-pay penalties, which can accumulate quickly. In extreme cases, not filing taxes can result in criminal charges, leading to fines or even imprisonment.
So, what is the penalty for filing taxes late, you wonder? Well, it is more complicated than a flat amount. Keep in mind, the penalty rules for a late tax filing may be impacted if you have a penalty for not paying. Let’s dig into the details.
- Failure to file penalty: 5% of the balance due per month (or part of a month), up to 25% of your unpaid tax as of the due date
- Failure to pay penalty: 0.5% of the unpaid taxes for each month (or part of a month) that the tax balance remains unpaid, up to 25% of your unpaid taxes.
As time goes on, the way your tax penalty is assessed changes:
- For each month or part of a month that your tax return was late, the combined maximum penalty is 5% (4.5% late filing and 0.5% overdue payment), up to 25% of the unpaid tax at the time of filing.
- The late filing penalty applies to the tax that remains unpaid after the due date. Unpaid tax is the total tax shown on your return reduced by amounts paid through tax withholding, estimated tax payments, and allowed refundable credits.
- If after five months you still have not paid your tax bill, the failure to file penalty will max out, but the failure to pay penalty continues until the tax is paid, up to 25% of the unpaid tax.
- When the failure to file and failure to pay penalties run concurrently, the maximum penalty assessed is generally 47.5%.
- If your return is over 60 days late, the minimum penalty for failure to file is the smaller of $485 (for 2024) or 100% of the tax required to be shown on the return.
2. Protecting Social Security Benefits.
For freelancers, filing tax returns is essential to report self-employment income to the Social Security Administration. This ensures that you receive credits toward Social Security retirement or disability benefits. Without these filings, you may not qualify for these crucial benefits when you need them most.
3. Maintaining Financial Health.
Unfiled tax returns can hinder your ability to obtain financing. Lenders often require tax returns to verify income and assess creditworthiness. Without these documents, securing loans for personal or business purposes can become challenging.
4. Claiming Refunds and Credits.
Freelancers may be eligible for various tax credits and refunds, such as the Earned Income Tax Credit. However, there is a three-year time limit to claim these refunds. By filing your tax returns promptly, you can ensure you receive any refunds or credits due to you.
5. Avoiding Increased IRS Scrutiny.
The IRS has been increasingly targeting high net worth individuals with unfiled tax returns. This means that freelancers with significant income are at a higher risk of being audited or investigated. Filing your tax returns reduces the likelihood of attracting unwanted attention from the IRS.
6. Staying Compliant with Tax Laws.
Filing tax returns is a legal requirement. By staying compliant, you avoid the stress and uncertainty associated with unfiled taxes. It also demonstrates your commitment to fulfilling your civic duties and maintaining good standing with tax authorities.
For freelancers, the importance of filing unfiled tax returns cannot be overstated. If you have unfiled returns you need to address them immediately, especially once the extension deadline of October 15 passes. With the IRS ramping up efforts to target individuals, ensuring your tax returns are filed accurately and on time is crucial. This not only helps you avoid penalties and legal issues but also protects your financial health and future social security benefits. Be proactive and stay compliant to enjoy the peace of mind that comes with being on the right side of tax laws as a freelance business owner.
