Whether you're a realtor, a barber, a mechanic or maybe even an entrepreneur that sells t-shirts, with a mechanic shop who occasionally cuts hair in the garage (who knows), you may feel that it's a smart idea not to report your income or file taxes. I mean, who'd blame you? However, there are many benefits to you filing a tax return, even if there's no profit.
Many self-employed individuals get away with not filing and/or not paying any income taxes when no one reports their income, so they basically operate below the radar. Most times you'd get away with paying very little or even not paying anything at all. If this sounds like you, we totally understand, but here are a few reasons you might want to get yourself out of that habit.
Buying A Home
The first and most obvious reason you may want to voluntarily report your self-employed income and file a tax return is to purchase a home and/or other real estate property. Right now, since no one is reporting your wages and you're not claiming any profits on your tax return, you basically have no proof of income. Banks & mortgage lenders will need to see two years "proof of income" in order to qualify you for a loan on a property. No matter how good your credit score is. This proof is most commonly your individual tax returns along with your W2s (if you’re an employee), 1099s (if you’re an independent contractor), paycheck stubs and sometimes even your corporate 1120s if you’re a business owner.
Getting Social Security
Aside from it being the morally responsible thing to do, one major motivation to claim your self-employment income or under the table pay and file a tax return would be to make sure you qualify to receive Social Security at retirement. You see, when you're an employee earning wages at a company, taxes are automatically withheld from your check. There are Federal withholdings, Medicare, and also taxes deducted for Social Security. These Social Security taxes are exactly what qualifies you to receive Social Security payments when you retire. And if you are self-employed and never report your income or file tax returns, you’re also not paying anything at all into Social Security. Meaning you won't qualify. In order to be eligible to receive Social Security when you retire, one needs to pay into Social Security for at least 10 years in their lifetime. So, when you do file a return, the self-employment tax paid, even if it’s a small amount, ensures you are contributing something to Medicare and Social Security. You will be very happy you did so when your 62 - 67. You'll most certainly be thanking your younger self.
Get a refund / Earned Income Credits
As hard as it may seem, claiming you’re self-employment income can actually earn you more money. The public consensus today is that if one claims cash they made under the table or working as an independent contractor, they would automatically owe money to the IRS. But in fact, this is not always true. Believe it or not there are many ways a self-employed individual can actually get a refund after filing a return. One way of course is by claiming the earned income credit and/or child tax credits when claiming a dependent. At the moment the earned income credit maximum is $6,431 which is all totally refundable along with the $1,400 child tax credits if you are claiming any dependents under the age of 17. It is very important that you consult a knowledgeable tax professional that can explain just what deductions and credits you qualify for in order to get the best tax results.
The small business/self-employment specialists at 5 Star Tax are experts on this matter & are available day and night to answer any questions you may have and lead you in the right direction. At the very least you owe it to yourself to reach out and ask a question or two. Consult an expert today by calling 561-420-0773 or ask your questions online at www.5startax.com.
Written By: Stevens Ewald 1/21/2019, Executive tax preparer for 5 Star Tax Inc.