If you have income from a side business that you didn’t know you had to file or forgot to file, it’s important to act quickly. The sooner you correct your tax return, the less you’ll have to pay.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
What happens if you don’t file side business income?
Not filing side business income usually means that you underreported your taxable income. When the IRS realizes you didn’t report all of your income on your tax return, it will send you a CP2000 notice or other tax notice.
You’ll get a bill for the income taxes and self-employment taxes you owe on the income you didn’t report. You’ll also have to pay interest and late payment penalties for the amount you didn’t pay on time.
Depending on what percentage of your income you didn’t report, the IRS may also charge you an extra penalty for not filing an accurate tax return. The IRS may also get extra time to audit you — instead of the usual three years, they might be able to go back six years or even forever for large underpayments.
What should you do if you didn’t file your self-employment income?
If you didn’t file your side business income, the best thing to do is usually file an amended tax return showing your correct income. Filing an amended tax return is similar to filing a regular tax return, except there are a few extra things to fill out to show what you’re changing.
You’ll calculate how much additional tax you owe when you complete your tax forms. Send the IRS a payment as soon as possible to reduce your interest and penalties.
If you realize the problem fast enough and amend your tax return before the original filing deadline, you may not even have to pay interest or penalties.
Will the IRS audit you if you amend your tax return?
Some tax pros think that the IRS audits amended returns more than other returns. The IRS keeps this information secret, so no one knows for sure.
The thing to remember is that it’s better to be audited when you filed correctly than to be audited when you left off sole proprietor income. So you shouldn’t avoid amending your return because you’re worried about an audit.
How can the IRS find out about unreported income?
The IRS has a number of ways of finding out about unreported income. The main way is the 1099-NEC and 1099-MISC forms they collect for informational purposes. If the IRS gets a form and sees you didn’t report that income, they will usually send you a letter asking for an explanation.
The IRS can also find income you didn’t report if something else triggers an audit. For example, they might request your bank statements and see deposits for the income you didn’t report.
What are the requirements for reporting side business income?
You must file all of your side business income in any year you’re already required to file a tax return. You must file a tax return in any year you have $400 or more in business income.
It doesn’t matter if you got a 1099 or not. You have to report the income even if you didn’t get a 1099. If you got your 1099 late, you still have to file your tax return on time. You’re responsible for knowing how much you made.
Can you still deduct business expenses if you file late?
You don’t lose your business expenses if you didn’t file your side business income. Your responsibility is to file an accurate tax return.
If you’re entitled to a tax deduction for a business expense, you can include that deduction when you amend your tax return.
If you didn’t realize you forgot to include some of your income until the IRS sent you a notice, you might owe less than what they say. If you didn’t include a 1099 for $1,000, they’ll send you a bill for taxes on $1,000 in income. However, if you also left off $200 in deductions, you only need to pay taxes on $800.
Do you need to adjust your quarterly tax payments?
If you had to amend your tax return, you might need to double-check your quarterly tax payments for next year. For example, if you were planning to make estimated tax payments based on 100% of the tax you owed last year, remember that the tax you owed increased when you amended your return.
The IRS calculates your required estimated tax payments based on your amended return, not your original return.