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Failing to report income could have serious consequences. Read on to learn more. [[{“value”:”
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There are very few types of income the IRS does not get a piece of. Roth IRA withdrawals fall into that category, as do withdrawals taken from a Roth 401(k).
But otherwise, when you earn income, whether it’s interest payments in a savings account or dividend payments in a brokerage account, you’re required to report that income so the IRS can take its share. Similarly, when you earn freelance income, you have to report that income on your taxes and pay the IRS a portion. And failing to do so could have serious consequences.
Don’t assume the IRS won’t find out
When you’re paid as a salaried employee, you have taxes withheld from your paychecks on an ongoing basis. When you’re paid on a freelance or self-employed basis, you get your full wage, and it’s on you to allocate some of that money for tax purposes.
If you’re paid $600 or more from a given company or entity, it’s obligated to issue you a 1099 form — specifically, a 1099-NEC (non-employee compensation). And every time you’re issued a 1099 form, the IRS gets a copy as well. So it’s a really big mistake to not claim income on your tax return that’s documented on a 1099 form, since the IRS is apt to get wind of it.
Furthermore, even if you were paid less than $600 by a given company and therefore won’t get a 1099 form, you still have to report that income and pay taxes on it. And while you might wonder how the IRS would find out about income not documented on a 1099, the answer is, you might get away with hiding it, or maybe you won’t. But do you really want to take the chance?
Not reporting freelance income could have serious consequences. At the very least, you should expect to pay penalties on unreported income. If you’re accused of tax evasion, that could have serious criminal consequences. So it’s just plain not a practice you want to engage in.
Another thing you should know is that as of now, third-party payment platforms like Venmo are only required to issue 1099 forms to those who receive over $20,000 in payments from over 200 transactions for the 2023 tax year. That rule is set to change in the future so that payments of $600 or more trigger a 1099 form from third-party platforms.
But again, the reporting rules on your part are the same. If a freelance client paid you $2,000 through Venmo and you didn’t get a 1099 form from Venmo for 2023, it doesn’t mean you don’t have to report that income.
How to avoid a tax headache as a freelancer
When you earn freelance income, you’re required to make estimated quarterly tax payments on your earnings so you’re paying the IRS during the year. It’s a good idea to work with an accountant or tax professional to come up with those numbers. That way, you’re less likely to owe a whopping sum when you go to file your tax return.
Another thing it pays to do is set money aside on top of those estimated quarterly payments in case they end up being a bit off and you wind up owing the IRS during tax season. But don’t not claim freelance income due to an inability to pay a tax debt. The IRS is very good at recouping funds it’s owed, and it’s known to work with filers by letting them pay their debts off over time. So you’re better off being honest about your income and figuring out a way to pay if need be.
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