You dutifully pay your taxes every year, but some workers can find the process more challenging than others. This is especially true for those who are self-employed and receive a 1099, rather than traditional employees who receive a W-2.
If you are self-employed and receive a 1099, it is important to pay your quarterly taxes on time, include all income on your tax returns and do not exaggerate work-related expenses. Doing so could put you at risk for a costly and stressful Internal Revenue Service (IRS) audit.
What is an IRS audit?
The IRS will initiate an audit if it suspects there are abnormalities in your tax return. The IRS identifies taxpayers to audit through a computer system that scans tax returns to identify irregularities.
Tax returns set aside by the computer system will then be reviewed by a live IRS employee before you are notified of the audit.
The goal of IRS audits is to collect additional taxes owed. This can trip people up if they are self-employed with a 1099.
Report all income
If you are self-employed, all your income is taxable. You must report it on your annual income taxes.
Your income includes:
- Work for which you receive checks or electronic payment
- Cash payments
- Interest and dividends paid
If you fail to report all sources of income, you could risk being audited.
Be careful with deductions
If you are self-employed, there are a variety of tax deductions you can claim on your annual income tax return.
Your deductions will be included on Schedule C. They are then taken out of your annual earnings to calculate your taxable income.
However, you want to be careful not to go overboard on these deductions or exaggerate your expenses. If your deductions and reported expenses go above and beyond what would be expected, it could lead to an audit.
Be careful about reporting if you get are self-employed
If you are self-employed, you face some differences in paying income taxes that traditional employees do not. You want to be careful to report all income and avoid going overboard with deductions and expenses so that you do not put yourself at risk for an IRS audit.