What Happens If You Don’t Pay Self-Employment Tax?

Self-employment tax is a significant financial obligation for individuals who work for themselves. This tax primarily funds Social Security and Medicare, which are federal programs providing retirement, disability, and healthcare benefits. Unlike traditional employees whose employers withhold these taxes from their paychecks, self-employed individuals are responsible for calculating and paying these amounts directly.

Understanding Self-Employment Tax Obligations

Self-employment tax consists of Social Security and Medicare taxes for self-employed individuals. This obligation applies to those who earn net income from self-employment above a certain threshold, generally $400. The combined self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies to net earnings up to an annual limit, which is $168,600 for 2024 and $176,100 for 2025, while the Medicare portion applies to all net earnings without a cap.

Self-employed individuals typically pay this tax, along with their income tax, through estimated tax payments made quarterly. These payments are calculated using IRS Form 1040-ES, Estimated Tax for Individuals, to ensure tax liabilities are met throughout the year. The IRS considers self-employed individuals as both the employer and employee, making them responsible for both halves of these taxes. Taxpayers can deduct one-half of their self-employment tax when calculating their adjusted gross income, which helps reduce their overall income tax liability.

Consequences of Unpaid Self-Employment Tax

Failing to pay self-employment tax can lead to several penalties and enforcement actions from the Internal Revenue Service (IRS). The IRS assesses penalties for both failure to file a tax return and failure to pay taxes owed. The failure to file penalty is typically 5% of the unpaid taxes for each month or part of a month a return is late, capped at 25%. If a return is more than 60 days late, a minimum penalty also applies, which is the lesser of $510 for 2025 or 100% of the tax owed.

Separate from the failure to file penalty, a failure to pay penalty is assessed at 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, capped at 25%. If both penalties apply in the same month, the failure to file penalty is reduced by the failure to pay penalty, resulting in a combined monthly rate of 5%. Interest also accrues on underpayments from the original due date until the tax is paid in full, calculated at the federal short-term rate plus 3%, compounding daily.

Beyond penalties and interest, the IRS may impose an accuracy-related penalty if there’s a substantial understatement of income tax or negligence. This penalty is 20% of the underpayment amount. If non-payment persists, the IRS can take collection actions such as filing a federal tax lien. A tax lien is a legal claim against all of a taxpayer’s property, including real estate and financial assets, securing the government’s interest in the debt. This public record can significantly impair a taxpayer’s ability to obtain credit or sell property.

If a tax debt remains unpaid, the IRS can proceed to a tax levy, which involves the legal seizure of property to satisfy the debt. This can include garnishing wages, seizing funds from bank accounts, or even confiscating assets like vehicles or real estate. Before a levy, the IRS typically sends a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” at least 30 days in advance.

Addressing Unpaid Self-Employment Tax and IRS Procedures

When facing unpaid self-employment tax, taxpayers should first file any delinquent returns and make payments as quickly as possible to limit penalties and interest. The IRS offers various options for taxpayers who cannot pay their full tax liability immediately. A short-term payment plan allows up to 180 additional days to pay the balance, though interest and penalties continue to accrue.

For those needing more time, an installment agreement allows taxpayers to make monthly payments for up to 72 months. Eligibility often depends on the amount owed, with individuals owing less than $50,000 in combined tax, penalties, and interest typically qualifying. Setting up an installment agreement can reduce the failure to pay penalty to 0.25% per month while the agreement is active. Another option for taxpayers experiencing significant financial hardship is an Offer in Compromise (OIC), which allows taxpayers to settle their tax debt for a lower amount than what is owed.

The IRS identifies non-filers or non-payers through various means, including matching information from forms like Form 1099-NEC, which reports nonemployee compensation. Upon identifying a discrepancy or unpaid balance, the IRS initiates a sequence of notices, such as CP notices, which inform taxpayers of their outstanding tax obligations and demand payment. Responding promptly to these IRS notices is crucial to understand the issue and explore resolution options before the IRS takes further enforcement actions like liens or levies.