One of the benefits of being a contractor is control. As an independent contractor you get to control what type of work you take on, when you complete the project, and the methods you use to get the job done. You also get to set the price and lead negotiations for your compensation for each project.
One of the downsides is taxes. As a contractor, you are responsible for meeting your tax obligations with the Internal Revenue Service (IRS). There is not an employer to take on this burden on your behalf.
But what if you don’t?
What if you chose not to file with the IRS?
Will they even know?
This is a risky game for the following reasons:
#1: They will know.
The fact is you are not the only one responsible for reporting the work to the IRS. The business that contracted you for the project will also file forms with the IRS. This is one of many reasons the IRS will likely find out about the arrangement.
#2: The penalties will snowball.
What may start out as a quarter of unpaid tax obligations can quickly skyrocket into hundreds of thousands in tax obligations, penalties and interest — not to mention the potential for imprisonment if the IRS tries to argue that your actions were an intentional attempt to avoid tax obligations. Those with a relatively small tax debt, under $50,000 or so, can likely come up with a manageable repayment plan but a larger debt requires stronger action.
#3: The IRS is just the start.
It is important to note the IRS is just one taxing authority to take into consideration. You will likely need to pay state taxes in your home state and, depending on how your business operates, could owe state taxes in other states as well. This can mean that in addition to dealing with the IRS you could find yourself facing the ire of state taxing authorities.