Monday, February 5, 2007

1099 Forms and the Unpaid Taxes

Hey 1099ers and Indies!

The government is owed $300 billion in taxes. And they want to collect it – now! Are you one of the culprits? You might be because the IRS says 80% of the tax is owed by individuals, not corporations. And guess which individuals they say owe most of that money. An article in Friday’s New York Times, Democrats Seek Unpaid Taxes, reports that according to the IRS almost all of the tax owed on unreported business income is due “from sole proprietors, like painters, plumbers, dry cleaners, florists, limousine drivers and restaurant owners.”

The IRS thinks you are cheating. You’re hiding income. You get paid in the parking lot or under the table and so you don’t report the income.

That may be so. Some indies do hide income. But I think the bigger problem is that indies don’t know what to do with 1099s that they receive. They stick them in a drawer … for later. Or often an indie doesn’t receive a 1099, and she thinks that since she were paid, let’s say $6,000, and her expenses were more than that, why bother to file a tax return.

Here’s a figure that’ll get you shaking your laptop: When someone you worked for sends a Form 1099-MISC for $6,000 to you and to the government, that form notifies the federal and state government that you earned the money. The Feds then expect about $2,000 from you in taxes.

That’s right! If you deduct no expenses from your freelance income, you should plan on paying about about 30% to 40% of your income as taxes. Here’s an explanation about how that works: Taxes: Which ones and how much do I pay?

Even with no 1099 the government can learn about your income – and their methods of detection keep getting easier. One way, for example: If you design a website for me I’m going to deduct the expense, even if I didn’t send you a 1099 or even if I paid you in cash. And if I’m audited, the IRS now knows about you.

If you get a 1099 the government gets one too. And the government knows only about your income, it knows nothing of your business expenses. That means, they are expecting that 30% to 40% tax payment. So, to pay less tax: File a tax return, claim all your income, and deduct every business expense possible.

Click here for a complimentary copy of the Self-employed Business Expenses List.

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