Self-Employed Workers: More Likely to Be Audited?

Mar 4, 2012
KC Morgan

Self-employed? An IRS tax audit may be in the cards. - Accounting planner and calculator - djshaw

Tax responsibility is a burden the self-employed must accept, but it may become too much to bear when an audit is looming. Is it a professional hazard?

Tax audits are so frightening, they’ve been the subject of movie plots, horrible nightmares and intense discussions. In real life, tax audits are powerful enough to topple Mafia bosses, billion-dollar corporations and businesses that seem like they’ve been around for ever. In self-employment, a tax audit is just one more burden on a pile of big tax responsibilities. But is it just one of life’s little quirks, or something that the self-employed are causing because of their own professional choices?

Self-Employment Taxes

Self-employed professionals pay the same amount of taxes as every other type of worker, but they have to go about it in completely different ways. While traditional employers go straight from point A (getting to tax time) to point B (filing taxes), the self-employed have to go the long way around. Professionals who work for themselves may go through the entire alphabet, figuratively, before they’re done filing self-employment taxes.

The self-employed do not have income tax payments subtracted from the monies they receive, because they operate as independent contractors. Instead, the self-employed are responsible for keeping track of all the money they receive from all employers and clients. Yearly, bi-yearly or monthly, self-employed professionals are responsible for reporting these earnings to the government and subsequently paying the percentage of income taxes they owe. Everyone pays a percentage of their income to the government, but the self-employed frequently pay it one lump sum.

And that’s not all. In addition to standard income taxes, the self-employed must also pay for their self-employment taxes -- a separate payment. In the main, these self-employment taxes go toward programs like Social Security, which traditional employees also contribute toward with their own tax payments. The difference is, most employers match employee contributions to Social Security and similar programs, literally making tax payments smaller for their workers. Self-employed workers don’t receive this perk.

The self-employed use a different set of tax forms than traditional workers, and the whole thing can get pretty confusing even when it’s done only once a year.

Self-Employment and the IRS

When self-employment taxes are confusing, it’s no wonder they’re a frequent target for IRS audits. Yes, the rumors are true: the self-employed are much more likely to get audited than others. Because self-employment taxes are among the most confusing of all, the IRS wants to ensure that people are filing them (and paying them) correctly -- thus, the reason for the audits. Small businesses are often targeted by audits from the IRS for the same reasons.

During such audits, the IRS more frequently finds mistakes among self-employment taxes. Omissions and incorrect numbers raise red flags that encourage audit behavior. Always carefully check tax paperwork. Make sure all income received is claimed, all deductions have receipts and paperwork to back them up and all payments are in order. Keep tax paperwork perfect to avoid receiving extra attention from the IRS.