Taxes can be complicated and confusing. So complicated, in fact, taxpayers might be tempted to roll the dice and just skip tax season altogether. Knowing the IRS is watching may be the only thing holding some people back from doing just that.
Yet, a recent independent survey of 500 freelancers by QuickBooks Self-Employed shows some 36 percent of self-employed workers are taking their chances. Why are more than a third of the self-employed not paying taxes?
The Complications are Real
It’s no secret that self-employed workers face more challenges than W-2 employees in many respects. While traditional employees can count on a regular paycheck, 31 percent of self-employed workers say they struggle to get paid on time. In fact, it’s their No.1 challenge, followed by:
- Self-motivation (30 percent)
- Finding work (26 percent)
- Doing taxes (20 percent)
- Marketing (20 percent)
There are good reasons why doing taxes makes the top five of anxiety-inducing struggles for the self-employed. While 17 percent of workers worry about finding deductions, one in five says they’re concerned about saving enough money for taxes in the first place.
Meanwhile, one in four is concerned they’re not making accurate estimations regarding how much they should be paying in taxes. That makes a lot of sense since 30 percent of self-employed workers are worried they might not be filling out the forms correctly, perhaps because the same number report they’re bad at keeping track of paperwork.
Older Workers are More Tech-Savvy
While self-employed workers age 18 to 34 struggle more with filling out tax forms correctly, workers age 35 and older say they’re primarily concerned with keeping track of their tax forms.
Interestingly enough, older generations are more comfortable filing themselves, through a tax software. While 42 percent of taxpayers 55 and older use such programs, only 33 percent of self-employed workers aged 18 to 24 do the same.
Tax Evasion (However Accidental) is Risky Business
The data shows that 36 percent of self-employed workers have been audited by the IRS, and almost one in three of those had errors on their taxes. Part-time/occasional self-employed workers had the most errors (50 percent, to be exact).
Younger workers are more likely to be audited than their older counterparts. Only 11 percent of self-employed workers age 54 and older have been audited, but the same cannot be said for nearly half of all 18- to 24-year-olds. On average, 46 percent of these young taxpayers say they have been audited.
The injustice of this, to some young taxpayers, might be that older individuals are less likely to report their income on taxes. While 7 percent of taxpayers age 18 to 24 report none of their earnings, that number goes up to 10 percent for self-employed workers over the age of 45.
One reason self-employed workers are audited so frequently likely has to do with the fact that it’s easy to get behind on taxes when you work for yourself; 33 percent of self-employed workers admit to getting behind on their taxes. Reasons include everything from underestimating how much they need to pay (42 percent) to forgetting to pay (16 percent). Other factors include not being able to afford the amount they owe (30 percent), not knowing they have to pay taxes (16 percent) and not knowing how to pay taxes (10 percent).
But getting behind on taxes is one thing. Not filing them at all is entirely another. So why are 36 percent of self-employed workers not paying taxes?
Breaking Down the 36 Percent
Of the 36 percent of self-employed workers who don’t pay taxes, 9 percent cite no reason (saying they “just don’t” pay taxes), 17 percent say they don’t make enough to pay taxes, and another 10 percent say their losses exceed their profits, so they don’t owe any taxes.
While these are likely all true, the numbers are tough to verify since only 68 percent of self-employed workers report all their income on their taxes. Another 6 percent don’t report any of their income, while 13 percent say they report half or less.
As it happens, part-time self-employed workers are less likely to pay taxes compared to full-time self-employed workers. That’s likely due, in part, to the fact that 31 percent of part-time self-employed workers say they don’t make enough to pay taxes.
Once again, it’s hard to check the math on these assertions because part-time/occasional self-employed workers are twice as likely to underreport their income compared to full-time self-employed workers.
While one in 10 full-time self-employed workers will report 50 percent or less of their income, one in five part-time self-employed workers will do the same.
More Awareness Could Mean Better Behavior
A lack of overall tax knowledge could be a contributing factor to why some self-employed workers aren’t paying taxes or reporting their income. The fact that 10 percent don’t know how to pay taxes suggests this is likely.
The Tax Cuts and Jobs Act will affect nearly every American’s taxes for tax year 2018. While it’s understandable that many self-employed workers have no idea how the new law will impact their taxes, you may cringe to know one in 10 self-employed workers didn’t know there even was tax reform. Of those who did know, 28 percent say they expect to pay more, 16 percent say they think they’ll pay less and 20 percent say they don’t know how it will impact their taxes.
Often, a lack of understanding results in a lack of action, but what if self-employed workers understood their taxes so well that they knew what parts of the new law would affect them the most? Perhaps they’d be able to make a plan in advance, knowing, for instance, that certain deductions (including the home office deduction) were scrapped and replaced by a few new deductions (like the qualified business income deduction). Could improved understanding help self-employed workers stay on top of their tax responsibilities?
When asked what areas of taxes they’d like to know more about, self-employed workers named “anything and everything tax-related” as their number one response. This was followed by deductions, write-offs and tax breaks, then why they pay so much in taxes, industry specifics, and how to get better at estimating and saving for taxes.
In the end, the IRS might be the stick that keeps taxpayers in line, but it’s possible the best way to make taxpayers out of non-taxpayers may have more to do with education than punishment. As a tax professional and trusted advisor for your self-employed clients, you’re in a unique position to help them understand their tax and financial situation, and plan for a successful future.
With better understanding, and access to great resources and professionals who can ensure tax returns are filed correctly, getting taxes paid on time should be the least of a business owner’s worries.
Editor’s note: This article was originally published on the QuickBooks Resource Center.