It’s not just missing income. IRS records show that self-employed workers and others who file quarterly estimated-tax payments are prone to get those wrong, according to a report last week from The Wall Street Journal. The number of filers penalized for underpaying estimated taxes jumped from 7.2 million in 2010 to 10 million in 2015, the paper found. Over that period, the average penalty dropped from $210 to $130.
To avoid a surprise come tax time, make sure you understand the tax obligations of your employment, said Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. Consumers used to full-time work may not realize that federal and state taxes aren’t being withheld, or that they will also need to account for the self-employment tax to cover Social Security and Medicare.
Keep a detailed log of employers, earnings and whether the employer paid taxes on that paycheck, said Friday Burke, an enrolled agent and the founder of Dr. Friday Tax & Financial Firm in Nashville, Tennessee. Mismatches between what you report and what the IRS has in its records often come back to bad record-keeping.
“Usually it’s because they completely forgot something that happened,” she said, like a short-term project or one paid in cash. Even if an employer doesn’t send a 1099, the IRS requires you to report that income.