Can You Get a Refund if You Pay Nothing In?

Image courtesy of user Geralt on
Image courtesy of user Geralt on

Question from a web visitor: can a sole proprietor get a refund if they paid nothing in?

Answer: this discussion goes beyond sole proprietors, and the short answer is “maybe.”

Tax refunds are a byproduct of the following:

  1. Your tax liability
  2. The tax credits you qualify for (and whether or not those credits are refundable)
  3. How much you paid in, in estimated tax payments and paycheck withholdings

It is indeed possible to get a refund without paying anything in.

There are two refundable credits: the earned income credit, and part or all of the child tax credit.

Since the web visitor specifically asked about sole proprietors, let’s use that as an example:

Annie is a sole proprietor with net income of $20,000. Annie is single, and files as head of household because she’s raising her daughter. Let’s assume Annie claims the standard deduction, and that she makes no estimated tax payments. The 20K of proprietorship income is all the income she has for the year.

Let’s calculate her self-employment tax first: $20,000 x .9235 = $18,470 x .153 = $2,826 SE tax. Her deduction for 1/2 of SE tax will be $1,413.

Now let’s run through the income-tax calculation (this example uses 2015 amounts for standard deduction, tax tables, etc.):

  • $20,000 net income
  • ($1,413) SE tax deduction
  • $18,587 AGI
  • ($9,250) standard deduction for head of household
  • ($8,000) exemptions
  • $1,337 taxable income
  • $134 income tax liability
  • ($134) non-refundable portion of the $1,000 child tax credit
  • $2,826 self-employment tax
  • $2,826 total tax liability

Now, let’s look at the earned income credit. Annie, being single with one child, qualifies for a $3,317 EIC. She also can claim the remainder of the $1,000 child tax credit that wasn’t used up (she used $134 of it in the tax calculation above, so $1,000 – $134 = $866 refundable CTC).

So, Annie would get a refund, calculated as follows:

  • $2,826 tax liability
  • ($3,317) EIC
  • ($866) CTC
  • $1,357 refund

This is a long way of answering the question posed by the web visitor: can a sole proprietor get a refund without making estimated tax payments? Yes.