As if you needed another reminder: April 15th is around the corner, which means it’s high time you file that tax return.
Don’t have the time, or, if you owe money, the funds? It’s best you file something, even if your payment isn’t in the full amount. If you don’t, you could face penalties from the IRS – and even from credit bureaus and your lenders, too.
Penalties for not filing at all
It’s true that most federal tax returns are for refunds, for cash that the IRS owes you, not the other way around. But it’s incredibly important you file anyway, because the consequences for not doing it at all can be severe.
One: you stand to lose money because of several penalties, detailed below.
Two: a late return can hit your credit score. If you fail to file a return, and if your score takes a hit, it could be a good 7 years before this blemish drops from your credit report.
Do I owe money to the IRS?
Before we jump into the details, it’s important you understand the difference between paying late and filing late. They sound as if they’re one and the same, something you do in one fell swoop, but that’s not actually the case – and tardiness for each carries different penalties.
Most folks have already paid throughout the year. If you’re a full-time employee, your employer will withhold your federal income taxes for you – as well as your contributions to Social Security and Medicare.
However, if you’re an independent contractor – that’s a freelancer, for the unindoctrinated – that’s not the case. And that’s part of the appeal of the position for you and the company for which you work: relatively minimal responsibilities to each other.
Unfortunately, for you, the freedom freelancing affords you also makes you vulnerable to higher tax rates. You likely won’t file for a refund, as most Americans do; instead, you’ll file for taxes you owe to the government.
You should know by now whether that’s the case, if you owe further cash – the IRS will have mailed you a Form 1099, which informs you of miscellaneous income that’s yet to be taxed.
Pay late if you have, too, but don’t file late
For you, the independent contractor, who may have trouble with filing on time, you also face further penalties for deferring your return. Because, as we’ve already suggested, there’s a difference between paying late and filing late.
The full-time employee will have paid all their federal income tax and then some – hence the refund – while you owe, and therefore risk penalties on top of filing late. As always with our tax code, there is an exception to this rule: that full-time employee could, too, owe money to the IRS if they have a great deal of untaxed income apart from their wage and salary.
Here’s a breakdown of the penalties you could face for filing or paying late.
1. Filing late will get you; it carries the most severe penalty of ‘em all:
- 5% each month, at a maximum 25% of the outstanding amounts – that’s 5 or more months without filing your return.
- After 60 days, your total penalty will spike; it’ll be either $135 or the amount you owe, whichever is lesser.
- To avoid this penalty, file any of a number of forms, depending on your needs.
2. Late payment isn’t great either:
- 0.5% each month, or 6% a year.
- You can avoid this payment if you a) pay 90% of your tax liability by April 15th or b) successfully file Form 1127, which we describe below – although only people suffering from an “undue hardship” will qualify.
3. Interest payments, too, apply to any outstanding amount:
- 3% a year, compounding daily
You can avoid some of these penalties, but you’ll have to file a form for your late return to do so.