I’ve briefly held a few jobs that deduct for taxes, but the majority of my financial acquisitions have been freelance work in the arts. Most were paid in cash, some personal checks. I have never filed an income tax in my life, and I don’t even know how. I am in my mid 20’s and I feel kind of stupid asking people I know about such basic things, so I ask you, dopers.
Am I fucked somehow for negligence in handling these matters? What can I do to remedy this situation and be clean in the eyes of the IRS?
Also, how do deductions work? What does it mean to say that business expenses are tax deductible? If I bought a 2 thousand dollar computer for business and filed that, would 2 grand be deducted from my taxes owed? What about charitable donations?
What steps can I take right now to make sure I am legally earning money?
Charitable donations and business expenses reduce your income. From that, your taxes will be reduced, but it’s not a direct discount from your taxes. For example, if you were paid $10,000 and gave $2,000 to charities, your taxable income would be $8,000. That’s the amount you would be taxed on.
As to your history with the IRS, I don’t know enough to comment.
This link is to IRS Publication 17 (Your Federal Income Tax for Individuals). This will give you most of the answers to your questions about who must file, what is taxable income, etc.
It’s in pdf format, so you will need Acrobat Viewer to view the document.
In regard to your question about deductions, no the amount you spend does not deduct directly from the taxes owed, but goes as a credit against the amount of your income, which is then used to calculate the taxes.
If you’re not sure how to proceed, you may want to get a software program like Tax Cut or TurboTax, which will walk you through the process with a Q&A tutorial format to help determine what is taxable and what isn’t.
First of all, freelance income does not equal nontaxable income. But it appears that you’ve realized that.
As a freelance self-employed person, I pay quarterly estimated taxes on March 15, June 15, September 15, and January 15 (yeah, I know they’re not exact quarters, don’t ask me why), and then it all gets squared up exactly on April 15. Every check a client sends gets 30% lopped off the top and set aside: about 15% for income tax and the other 15% for social security. (Employers pay half, but the self-employed, as their own employers, pay the whole thing.) The actual percentage usually comes out to 20-25%, but I use the slush for property taxes, tax preparation fees, occasional dipping, etc.
Deductions are GOOD. Save all your receipts and keep impeccable records.
The IRS might develop a sudden interest in you if you start filing with no previous income history, Still, it’s best to come clean.
The main thing to check, and soon, is whether you are obliged to file. The IRS is very forgiving about most honest errors, but they are not necessarily forgiving about someone who didn’t even bother to file a return.
Find yourself an accountant or tax expert to have a conversation with. It may cost you a bit of money to do so, but it will probably save you major headache in the long run.
That March 15 is probably a typo–it should be April 15. And it’s not quite exact quarters because they want you to do a look back at the final quarter of the year and adjust the last quarterly payment based on how the full year looks–thus the January 15 payment. The quarterly payment that would be made in March is delayed until April 15 so that the current year’s est. payments can all be based on the prior year’s completed return.
Don’t panic too much, Headcoat. If you haven’t made very much money in any year and you’ve had some amounts withheld, you may well be in the lowest tax bracket, possibly not even liable for any tax–you may even be entitled to a refund becasue of the withholding (or, you may be too late). You do need to figure out whether you’ve made enough that you are required to file however (whether you owe any taxes or not). Call an accountant now–they’re used to handling these things. They charge less than $100 for a simple return–you may pay a bit more to get your mess untangled.
By the time I was 14, my parents were making me file the 1040EZ. It is a one page document, and it was so easy, a 14 year old could do it on his own. I never actually paid any taxes (my lawn mowing jobs never brought in enough income) but it was the whole “teach the kid a lesson” thing.
Depending on your situation, you could always start with the 1040EZ. I don’t remember, but you might not be able to make deductions on the 1040EZ. Regardless, after 20 minutes, you will have a feel for whether you want to see an accountant, buy turbo tax, fill out the regular 1040 form, or just file the damn EZ.
First is whether you were being filed under someone else’s return. Was a parent or guardian listing you as a dependant on their tax return during the years you didn’t file?
Second is the amount of tax you owed during the period you didn’t file. I’m assuming from your OP, that your income during that period was relatively low. You probably wouldn’t have owed any tax if you had filed. However failure to file is technically illegal, even when you wouldn’t have owed any payments. You may be laible for fines for failure to file. If so, what you’re going to be seeking is some form of tax amnesty.
My best advice is to find an accountant, or in a worst case scenario a tax lawyer, and give him all the details. They’ll be able to advise you on your best course from there. Unless you plan on spending the rest of your life in the economic underground, you’re going to have to face up to the IRS at some point. The earlier you do it, the better off the results will be.
I hope this isn’t considered helping people break the law, but it should be noted that while not filing at all is one of the more serious tax infractions (IANATL) it’s also one of the hardest to get caught for, on the assumption that you’ve never filed (as the OP hasn’t)
Unless you’re famous, or someone squeals on you, or you’re ridiculously rich and/or have several paper trails leading to you, it’s entirely possible that the IRS might not miss your file in year N, given that they didn’t receive it in N-1. As soon as you’re in the system, however, better keep filing.
Because prison is not a fun thing, or so I’m told, I recommend filing… and for the first year, an accountant may not be that bad of an idea if you’re nervous and clueless. My parents always use an accountant, because they figure (perhaps correctly) that he’ll be able to save them enough time and money to pay for his services. To each their own.
You are correct – thanks. I have two tax transactions on April 15th every year: one to pay the first quarter’s estimated tax, and one to file my federal return for the previous year, same as everyone else, where I either pay the remaining tax or get a refund. Same for state.