7 Statistics about the IRS Self-Employment Tax

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IRS self-employment allows for an element of freedom and independence rarely enjoyed in the standard workforce. However, there are definite downsides, including a much higher tax rate. Highlighted below are a few things you should know about the IRS self-employment tax:

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  1. IRS self-employment taxes are based on approximately 92 percent of self-employment income.

This reduced taxation is designed to address the disparity between larger employers and sole proprietors during tax season, as large employers can take deductions on the FICA taxes they pay on behalf of their employees.

  1. Sole proprietors underreport their income by as much as 57 percent.

A 2007 Government Accountability Office report found that sole proprietors significantly underreported their income in 2001. This underreporting likely occurred in an effort to ease the overwhelming burden of self-employment taxes. While this tactic can minimize short-term tax burdens, it can backfire in the long-term.

  1. Self-employment tax rates have nearly doubled in the last forty years.

In 1976, self-employed professionals paid a far lower rate of just 7.9 percent. Since then, the tax rate for self-employed individuals has shot up to a whopping 15.3 percent.

  1. The annual count of non-employer businesses calculated by the Census Bureau reached 16 percent in 2013. 

This marked a 12 percent increase since the late 1990s, when the prevalence of this type of income had last been tracked.

  1. Approximately three percent of small businesses who file under Schedule C get audited by the IRS.

In comparison, just one percent of larger corporations are audited. This increased risk of auditing among sole proprietors is attributed to a lack of in-house taxation resources.

  1. While auditing sole proprietors, the IRS recommends over $1 billion in additional taxes.

In 2008, the IRS performed 72,803 audits of tax returns with gross receipts of over $25,000. These audits resulted in a recommended $1.1 billion in additional taxes.

  1. Business and personal expenses exceed income in over one of every ten sole proprietor audits.

In a review performed by the Treasury Inspector General for Tax Administration, 13 percent of sole proprietors had expenses exceeding income by over $10,000. In these cases, sole proprietors were believed to have understated self-employment income, overstated expenses, or engaged in some combination of the two practices.

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If you find self-employment taxes hopelessly confusing, you can benefit from targeted counsel. Call 720-398-6088 today to learn how we can help you get your tax situation under control.