Should I pay?

March 20, 2008 8:35 AM

Taxes: Should I claim this freelance I did last year?

I did some freelance web work for a church in 2006 - 2007. Was paid about 5K in 2007. I never received a 1099 from them. Do I have to claim this income?

I'm pretty sure the answer is going to be "yes, you should claim all income you received". But what I really want to know is: What are the chances that the IRS comes knocking on my door some day? Considering the fact I never got a 1099, how would they know I received this money?

posted by eightball to work & money (8 comments total)

If they ever do audit you, they may request your business bank records. If you are a sole proprietorship, this could mean your personal bank record. Then they will ask where the $5k came from.
posted by acoutu at 8:43 AM on March 20

Technically, you claim deductions and credits, not income. You report income. And yes, you need to report all your income.

I am not a tax accountant, but as a practical matter, I don't think you're likely to be audited, and if audited, probably the worst they'll do is make you pay the tax with interest and penalties. For that small an amount, and a first offense, given you can easily claim you didn't realize you were supposed to pay since you didn't get a 1099, I wouldn't imagine you'd be sent to jail.

I do not recommend this, however.

If you do decide to pay, you can reduce the burden somewhat by reporting the money in the year you earned it (accrual-based accounting) rather than in the year you were paid (cash-based accounting). So, for example, half in your 2006 taxes and half in your 2007 taxes. (Of course, with 2006 already gone, you'll be reporting it all on 2007 most likely, but keep this in mind for the future.) Also, if you use accrual-based accounting for your income you also have to do it for your expenses, which can be a bit of a pain if you have any expenses. For a sideline, you probably don't.
posted by kindall at 8:57 AM on March 20

I never received a 1099 from them.

Is all that you know that you didn't *receive* a 1099? Because that's not necessarily the same thing as them not sending a 1099, both to you and the IRS. And just because yours got lost in the mail doesn't mean that the IRS' copy also got lost.

If that's the case, chances would be pretty high that you'd get a letter from the IRS, along with demands for taxes owed (ouch), interest (more ouch), and penalties (this can REALLY hurt).

Perhaps you should call up the church and inquire about whether they were planning on sending you a 1099? That way, if they did already (perhaps to the wrong address, perhaps it just got lost), you're not screwing yourself. Of course, you asking may prompt them to get it together and send you one when they wouldn't have otherwise, but I'd personally be too risk-averse to just assume that church didn't send one at all. YMMV.
posted by iminurmefi at 9:22 AM on March 20

Yeah, always claim all income, 1099 or no. Sucks, but it's the law.
posted by mathowie at 10:35 AM on March 20

yeah, definitely report it this year.
posted by misanthropicsarah at 10:43 AM on March 20

You're not going to get sent to jail for failing to report $5K in income, even if they do catch you, as long as you can reasonably claim it was an honest mistake. But if the IRS does spot the missing money, they'll make you pay taxes on it, plus a penalty -- which if they find it several years hence, could be quite substantial. Say (hypothetically) you would owe $1,500 in taxes on that income -- with penalties, you might owe the IRS $2,000 or $2,500 if you pay it 3 years from now. That could wind up being rather painful.
posted by dylan20 at 9:52 PM on March 20

Report in all in 2007 because that explains why you didn't make your quarterly estimated payments this year.

From that $5000 read up on how to deduct: your home office, your travel to & from meetings with them (40-some cents/mile), your phone bill, your computer, all related software, your printer, any web-design or computer or art books, your Metafilter membership, half of a per diem rate (half comes out to ~$20-30) for any full days spent on business travel, supplies, and so forth. By the end of that, hopefully you only truly "earned" $2000 or something. Self employment tax on $2000 will be around $300, and then you add that $2000 to your income but then immediately deduct $150 (half of the SE tax). Assuming you're in a 15% tax bracket, that extra $1850 in income will also get you less than $300 more in additional taxes. So, assuming you pull of all those deductions, you pay $600 extra now in exchange for years of not wondering.

Also, if they ever do find you didn't report it, you'll owe really significant penalties that could more than double the amount (the fraud penalties look harsh).
posted by salvia at 1:43 AM on March 25 [1 favorite]

Nthing that legally you have to report it :( and you will get in trouble if you don't and the catch you. Fewer than 1% of tax returns are audited, however, not everyone has an equal chance of being audited -- the IRS has a formula that selects which tax returns are the most likely to have errors or fraud and yield more tax revenue if audited. I don't know enough about the formula or your tax history to know how likely it is that something in your return will strike their formula's fancy.

Salvia has some good suggestions. Related to those, J.K. Lasser publishes helpful books on tax deductions -- find the appropriate one, get it, and read it, it should more than pay for itself in tax savings!
posted by Jacqueline at 1:41 AM on March 26