Will I Be Penalized if I Cash My Paycheck and Never Pay Tax on My Earnings?

When you earn income in the United States, you must pay a portion of your income to the government. All U.S. residents and citizens owe income reporting and tax payment obligations to the Internal Revenue Service (IRS), and Massachusetts residents must pay state income taxes as well.

If you don’t report your income or don’t pay the taxes you owe, you can face steep penalties. In some cases, cashing your paycheck and never paying taxes on your earnings can also lead to criminal prosecution.

The Consequences of Cashing Your Paycheck and Never Paying Taxes

There is nothing wrong with cashing your paycheck. Lots of people do it, and it is a perfectly legitimate way to handle your money if you need to use your income right away. But, when you cash your paychecks, you must also make sure that you set aside enough of your income to pay the IRS and the Massachusetts Department of Revenue (DOR).

If you’re like most people, you have a portion of your income withheld to pay your taxes through your employer. While this might be enough to satisfy your federal and state tax obligations, it also might not. Additionally, even if you don’t owe additional income tax on Tax Day, you still need to file federal and state income tax returns.

Under federal and state law, there are both penalties for failure to pay taxes and penalties for failure to file annual income tax returns. At the federal level, the failure-to-file and failure-to-pay penalties are:

• Failure to File – The federal failure-to-file penalty is five percent of the tax you owe. This penalty is applied monthly, up to a maximum penalty of 25 percent.
• Failure to Pay – The federal failure-to-pay penalty is 0.5 percent of the tax you owe. This penalty is also applied monthly, up to a maximum penalty of 25 percent. If you also owe the failure-to-file penalty, your penalties will be combined (for a total penalty of five percent) for the first five months.

At the state level, the failure-to-file and failure-to-pay penalties in Massachusetts are:

• Failure to File – The Massachusetts failure-to-file penalty is one percent of the tax you owe. Like the federal penalty, this penalty is applied monthly and is subject to a maximum of 25 percent.
• Failure to Pay – In Massachusetts the failure-to-pay penalty is the same as the failure-to-file penalty.

Depending on your individual circumstances, various other penalties may apply as well. Additionally, when you owe back taxes and penalties, interest begins to accrue on all unpaid amounts immediately.

If you get charged with criminal tax evasion, the consequences can be even more severe. Under federal law, willfully attempting to evade tax carries up to a $100,000 fine and five years of imprisonment.

Request a Confidential Consultation with an Experienced Tax Attorney in Boston, MA

Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, represents Massachusetts residents in all federal and state income tax matters. If you have questions or concerns about cashing your paycheck and not paying tax on your earnings, you can call 617-692-2989, email ket@thornlawgroup.com or contact us online to request a confidential consultation.