What Happens if You’re Self-Employed and Have Never Filed Taxes?

Filing and paying taxes is an obligation everyone must comply with each year—otherwise, you risk hefty penalties and potentially even legal problems. Most taxpayers only need to file if their income is over the standard deduction for their filing status, but self-employed people must file if they have more than $400 in net income. 

For self-employed individuals, tax requirements can seem daunting. This leads many to make mistakes or fail to file their taxes annually. So what happens if you don’t report income to the IRS? It can hurt your personal and business finances and expose you to potential IRS collection actions and even legal consequences. 

If you have discovered this mistake, act immediately to correct it. The IRS takes tax evasion seriously, and your best bet is to stay open and honest with the agency. If you’re self-employed and have never filed taxes, this guide walks through the ins and outs of what to expect and what to do next.

What Is Self-Employment?

Self-employed individuals are those who run a business or work for themselves as independent contractors. They don’t work for an employer or receive a W-2 for taxes. Instead, self-employed individuals may have clients under a contract, and they’ll often receive a Form 1099 showing payments they've received from clients. 

However, many self-employed people don't receive 1099 forms from their clients. Generally, if you do work for individuals, you don't receive a 1099, and if you do work for business, you receive 1099s if they pay you more than $600 during the year. You are obligated to report any income received on your tax return, regardless of whether or not it is reported on a 1099.

Tax Basics for Self-Employed People

One of the biggest points of confusion for self-employed people is how to manage taxes. Here are a few important points to know:

• For independent contractors, taxes are not withdrawn from paychecks as they would be for a regular W-2 employment position.
• Self-employed workers are responsible for paying their own taxes throughout the year.
• This requires filing and paying taxes on a quarterly basis—known as making estimated tax payments—as well as filing an annual tax return.
• The self-employment tax is 15.3% for 2023 and 2024, broken down as follows:
  • 12.4% for social security
  • 2.9% for Medicare

This tax is in addition to your income tax rate based on your income bracket. 

Estimated Quarterly Taxes

If they owe more than $1,000 in tax for the year, self-employed individuals must pay estimated quarterly taxes on April 15, June 15, September 15, and January 15, or the next business day if these days fall on a weekend or holiday.

To avoid underpayment penalties, you must pay 100% of last year's tax or at least 90% of the current year's tax. You can pay quarterly by dividing your last year's total tax by four, or if you prefer to base your quarterly payments on your actual earnings, you can use Form 1040-ES to estimate your payments.

Reasons Self-Employed Individuals Don't File Taxes

American taxpayers owe the IRS billions of dollars in back taxes. This means many people fail to comply with tax regulations each year. What causes this discrepancy? 

For self-employed workers specifically, here are a few common reasons why self-employed workers may fail to file:

• Failing to understand the process - Many people simply don’t understand their tax obligations. They may think they’re doing everything right by filing an annual return. They may not realize they’re required to pay quarterly taxes until they receive a penalty notice in the mail. Or, taxpayers may not understand their required deadlines.
• Financial difficulties - Another common reason for failing to file is financial trouble. When people are going through a financial hardship, they may not be thinking about or prioritizing their tax obligations as they try to get back on their feet.
• Procrastination - As with any area of life, many people simply put off filing their tax returns. This could be for a number of reasons, like forgetfulness or thinking they are waiting for a better time to file.
• Unorganized financials - Complying with tax law requires self-employed workers to stay organized and keep important financial documents. Many business owners and individuals just don’t have the right systems in place to store and organize their information, which leads to issues with filing their tax returns.
• Fear of owing a lot of money - Of course, taxes can be expensive for business owners. They may not file because they’re afraid of what their tax bill will look like. This can be true even if someone isn’t experiencing financial hardship. 
• Being overwhelmed by the tax process - Tax regulations are complex, and they’re always changing. This can be extremely daunting to taxpayers, especially when they’re also trying to run a business or manage a long client list. 

Taxpayers may willingly try to get away with not filing and paying what they owe, which is known as tax evasion. This could mean they underreport their income or fail to file altogether. The consequences of making these mistakes are discussed next. 

However, in most cases, people simply get overwhelmed, and once they miss one year, they just continue to miss future years. Don't worry. A tax pro can help you get caught up.

Consequences of Not Filing Taxes

The IRS takes noncompliance very seriously and has many systems in place to detect if a tax return has not been filed and should have been. The IRS will begin a process of sending out notices to rectify the situation once they realize a discrepancy. Many times, the IRS will send a CP59 notice to taxpayers who expected to file but didn’t and think they owe. They will also send a form 15103 to complete to explain why a tax return was not filed.

The three main categories of fail-to-file consequences are legal, financial, and long-term implications:

• • Legal implications: Remember that it is against the law to fail to file a return or fail to pay the tax owed. You could eventually have to face criminal penalties and even jail time. 

• Penalties: Penalties for not filing and paying can get up to 50% of your balance. For example, if you owe $10,000, your bill jumps to $15,000.

• • • The failure to file penalty is 5% of your unpaid taxes for every month that your return is late, not to exceed 25% of your tax balance. Minimum penalties apply when a tax return is more than 60 days late.
    • The failure to pay penalty is 0.5% of your unpaid taxes every month, not to exceed 25%.
  • Loss of Tax Refunds: Self-employed people don't always owe taxes. By not filing, you also may be missing out on tax refunds you’re owed when you don’t file your return.

• Inability to prove income to lenders: Lenders often want to see your tax return, especially if you're self-employed and don't have W2s. Not filing can make it hard to get loans.

• • Effect on Social Security/Medicare benefits: When you're self-employed, the IRS uses your tax returns to figure out your Social Security and Medicare contributions. You won't get credit and may not be able to draw benefits if you don't file throughout your professional life. 
  • Long-term consequences: The IRS has no statute of limitations on unfiled tax returns. If you go years without filing, the agency can look back at any of those years and assess tax against you.

• IRS tax assessment: If you don't file, the IRS can issue a substitute for return and assess tax against you. As of 2024, the IRS has announced plans to go after 125,000 taxpayers with income ranging from $400,000 and up who have not filed tax returns. Usually, when the IRS files your tax return, the liability ends up being a lot higher than if you would have filed on your own. 

• Collection actions: If the IRS assesses tax against you with an SFR, the agency can start collection actions like tax liens and levies.

These consequences are completely avoidable. Talk to a tax professional when you’re having trouble filing on time or covering the tax payment you owe. 

Steps to Resolve Unfiled Taxes

To minimize penalties and other consequences, take action as soon as possible when your returns are still unfiled. Consider these steps when you are getting ready to deal with your unfiled returns.

Contact the IRS

If you received any type of notice from the IRS about your unfiled returns, follow the instructions on the document to contact the agency. Let the IRS know about any circumstances that caused you to be late, including an illness, the death of a family member, or other justification. 

If you have a valid reason that shows reasonable cause, you may qualify for first-time penalty abatement.

File as Soon as Possible

The next step is to get your unfiled returns as soon as possible. This will help you get on better terms with the IRS and avoid paying additional penalties or interest as time goes on. In most cases, you only need to file the last six years of returns, even if you have never filed. 

Apply for an Extension

If it’s still before the next tax deadline, you can apply for an extension to file your tax return, which will give you until October of that year to file. Just remember that you’ll still have to pay if you owe taxes by the original tax deadline. You need to submit an extension request by the original deadline as well. 

Talk to a Tax Professional

Consider discussing your situation with an expert. You never want to make further mistakes, and you want your issue resolved as fast as possible. Tax professionals will be able to advise you on the right way forward. 

Understand Penalties and How to Minimize Them

When you haven’t filed your tax return as a self-employed worker, you also need to review penalties the IRS issues, potential interest, and other implications. Start planning to cover these costs. 

You may be able to minimize your penalties by applying for first-time abatement or reaching out to the IRS about your financial hardship.

Apply for Tax Relief with the IRS

When you’re unable to pay what you owe the IRS after you file, you could qualify for tax relief. Consider setting up a payment plan, also called an installment agreement, where you pay an affordable monthly amount until your debt is paid off. 

You can also send an offer in compromise to the IRS, which offers what you are able to pay in the hopes that they will agree to settle your debt based on your situation.

Take Preventative Measures for the Future

You already know that staying organized is an important part of running a successful business. Make sure this applies to your taxes as well. Set up a better recordkeeping system so you never miss a deadline and can afford your tax bills. Here are a few tips:

• Keep expense receipts and other records. Rely on recordkeeping tools, like software or spreadsheets, to track your business activities. Create folders, whether digital or physical, to store your files securely. Keep business receipts, financial reports, invoices, and past tax returns where you’ll be able to access them easily. Effective recordkeeping is a must to stay in tax compliance.
• Use professional services for your taxes. There are many resources out there to help small business owners and independent contractors just like you. Tax laws are complicated, so you don’t have to handle everything on your own. Find an experienced accountant, tax attorney, or tax advisor to assist you.
• Create a tax calendar. If missing deadlines is a weak spot for you, set up an automated notification system or organized calendar that will help you stay on track. This is especially helpful when you have to pay quarterly taxes in addition to filing your annual tax return.
• File early when possible. When a new year begins, immediately start gathering your documents and preparing your list of expenses. When you have all your 1099s, bank statements and other tax forms, file as soon as possible. This helps you avoid procrastinating and missing the April 15 deadline.

Once you are back in compliance with the IRS, remember these important steps to avoid future problems. Working closely with a tax expert will ensure you never miss a deadline or greatly minimize the risk of mistakes.

Finding Tax Help as a Self-Employed Worker

Failing to file your tax return can lead to severe consequences. When you haven’t filed, make sure you file right away, talk to the IRS, and set up a payment plan that works for you. Talk to a professional when you feel overwhelmed about your tax responsibilities. 

Being proactive will help you stay on top of your tax obligations so you avoid building up penalties, interest, and even legal trouble. Thinking ahead and working with the right tax advisor will help you continue a successful self-employment journey.

FAQs if You’re Self-Employed and Haven’t Filed Taxes

What happens if a self-employed person never files taxes?

Failing to file tax returns or paying your tax bill will lead to penalties and interest charges, potential tax debt, and legal problems if you continue to ignore your obligations.

Can self-employed individuals face criminal charges for not filing taxes?

Yes. You may be charged with tax evasion by the IRS if you fail to file your tax return and continue to not file it or pay what you owe the IRS. If you’re convicted of tax fraud or tax evasion, you could face tens of thousands in fines and even jail time.

How does the IRS track unfiled taxes for self-employed individuals?

The IRS has several ways of ensuring taxpayers file their returns and pay what they owe. One way is through comparing tax documents received by employers, institutions, payment processing companies, or clients. They will be notified that a self-employed worker was paid through this process and will notice if the worker doesn’t also report that income.

What are the options for paying back taxes if I'm self-employed and haven’t filed in years?

First, file your outstanding returns as soon as possible. This is true no matter your reason for missing deadlines. You should also watch out for penalty notices that the IRS will send you for failing to file. Pay your tax bill and any penalties and interest by the deadlines. Alternatively, you can contact the IRS about getting tax relief if you’re unable to pay.

Are there any special considerations for self-employed individuals who haven’t filed taxes due to financial hardship?

You can provide documentation to the IRS that shows you’re experiencing a financial hardship, and the agency may temporarily hold collections on your account. Use Form 433F if you’re self-employed.

What if I forgot to report a 1099 form?

If you filed your taxes but forgot to report a 1099 form, you can amend your tax return to correct the issue. If you don't report the income, the IRS may add the income to your return and assess additional tax against you if relevant.

Get Help Catching Up on Unfiled Returns

Regardless of how long it's been since you filed your tax returns, it is possible to catch up. Even if you don't have your bookkeeping records, a skilled tax preparer can help you reconstruct the records you need to file. To get help now, use TaxCure to search for an experienced enrolled agent, CPA, or tax attorney.