I Didn't Earn Enough. Do I still need to report my business on my tax return?
This may come as a surprise to many people, but not everyone needs to file a federal tax return. The Internal Revenue Service (IRS) has threshold levels for tax return requirements just like tax brackets. Whether or not you need to file is primarily based on your level of gross income and status for the tax year. However, keep in mind that even if you aren’t required to file because of your gross income, you may still be eligible for a refund.
Benefits of Filing
You may find it profitable to file, even if you don't owe the government a penny. If you're entitled to a tax refund or to business tax credits, the only way to claim them is to file. You may also be able to write off your business losses against business income in future years. You can claim a refund or credit if you file late, but if you wait more than three years, you lose whatever money you were due.
Federal Filing Requirements
Status and gross income will be the primary factors for determining whether or not you are required to file federal taxes. The IRS has the following requirements:1
Also, any married individual filing separately who earns more than $5 must file a return.2
ï»¿ Overall there is no minimum age set for filing taxes, so tax returns are all primarily about income and tax status.
According to the IRS, businesses must file federal income tax returns, with two major exceptions. Partnerships are relationships in which participants join together for mutual benefit. A partnership has to file an information return to report income, losses, profits etc. Partnerships do not file tax returns nor pay taxes, because the profits and losses are passed through to the partners, who declare that as personal income.
There’s another exception for those who earn minimal compensation from self employment.
If somebody is working for himself and earns less than $400 a year, the taxpayer does not have to file Form 1040 or pay the self-employment tax.
Exceptions: Withholding and Tax Credit
If you are self employed and had any withholding from a job in which you were an employee during the calendar year, then you have to file to recoup your withholding. Also, if you took a business loss, it could offset your employment income so that you pay your tax at a lower rate.
You should also file if you qualify for the earned income tax credit. The EITC is a federal subsidy for low-income workers. It favors families because the maximum credit allowed increases with the number of people in your family. The EITC phases out as your income rises, but any excess beyond your tax liability will be paid out as a refund. The IRS offers a handy earned income tax credit calculator at www.irs.gov.
Exception: Offset Income
Let’s say that a couple of clients filed 1099s with the IRS for a total of $1,300 for your shooting wedding photos, but your costs offset that money. The IRS has no way of knowing that your income was flat and will assume that you owe taxes on the entire $1,300 until you file a Schedule C showing your expenses that offset your income.
Many tax filers that fall below the income threshold may be able to receive a refund through their tax filing, which can make filing beneficial. Refunds are available for W-2 employees and others who have had tax withheld from their paycheck during the year. The government also offers a few tax credits for low-income individuals that may provide you with some money back at tax time.3
If taxes have been withheld from your payroll during the year, and your gross income falls below the tax thresholds, you can be eligible to get that money back. Like for all taxpayers, knowing the credits you are eligible for can also help you during tax season.
Some other credits to consider for low income individuals include:
Earned Income Credit
Child Tax Credit
Saver’s Credit (retirement investing)
Child and Dependent Care Tax Credit
The Premium Credit (under the Affordable Care Act)
American Opportunity Credit (higher education)
Lifetime Learning Credit (higher education)
Penalties for Non-Filers
If your income is above the specified thresholds, you are expected to file and pay necessary taxes to the government. If you have a substantial tax obligation and do not file, the IRS can contact you. Generally, the IRS will provide clear notification of your obligations and all unpaid taxes will accrue penalties. Here is how they are calculated:4
A penalty of 5% of the unpaid tax
Reduced by the “failure to pay” penalty for any month in which both penalties apply
Charged each month a return is late, up to five months
If the return is more than 60 days late, the minimum late filing penalty is 100% of your unpaid taxes or $330 (whichever is smaller).
Understanding the IRS’s annual threshold limits is a primary factor in determining whether or not you must file a tax return each year. Most individuals will have similar tax scenarios from year to year, which can be helpful in knowing and understanding your tax obligations.
However, some people may experience drastic changes from year to year as a result of a drop in income from a lost job, a marriage, new children, or even a jump in income when moving beyond dependency or higher education. The IRS provides detailed information each year for every scenario, so the key is staying up to date on the requirements relative to your personal situation.
P.S. You should always maintain a record of your returns for up to six years.
The statute of limitations on tax returns says the IRS can look back three years at past returns, or six years if it thinks you've under-reported significant income. Though, If you never file, the statute of limitations never kicks in. In that case, the IRS says you should keep all relevant business records for income and deductible expenses for that year.
1. Internal Revenue Service. "Publication 501 (2019), Dependents, Standard Deduction, and Filing Information." https://www.irs.gov/publications/p501#en_US_2019_publink1000220687 "Accessed June 18, 2020.
2. Internal Revenue Service. "Publication 501 (2018), Dependents, Standard Deduction, and Filing Information." https://www.irs.gov/publications/p501#en_US_2018_publink1000220702
Accessed June. 18, 2020.
3. Internal Revenue Service. "Publication 501 (2018), Dependents, Standard Deduction, and Filing Information." https://www.irs.gov/publications/p501#en_US_2019_publink1000220720
Accessed June. 18, 2020.
4.Internal Revenue Service. "Common Penalties for Individuals." https://www.irs.gov/businesses/small-businesses-self-employed/understanding-penalties-and-interest
Accessed June. 18, 2020.