When you are self-employed, it typically means you work for yourself, as an independent contractor, and you own your own independent business. Here are a few key points that the IRS would like you to know about self-employment and self-employment taxes:
1. Self-employment income can include pay that you receive for full- or part-time work you do for a variety of customers. This could include income you earn in addition to your regular job, out of your home or from a separate location.
2. Self-employed individuals must file a Schedule C, Profit or Loss from Business, or a Schedule C-EZ, Net Profit from Business, with their Form 1040. These forms are used to calculate your net earnings from the business.
3. When you file these forms, you can deduct the business expenses or costs that you paid to run your trade or business. You can deduct most business expenses in full, but some costs may need to be allocated between personal and business use. They might even need to be ’capitalized.’ This means you can deduct only a portion of the expense each year over a period of years. Expenses can only be deducted for costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your particular trade or business.
4. Since you are self-employed, you will generally have to pay self-employment tax as well as income tax on the earnings from the business. Self-employment tax includes both Social Security and Medicare taxes. You compute this tax on based on the net income or profits from your business using a Schedule SE, Self-Employment Tax form.
5. If you are self-employed you may also have to make estimated tax payments. People make estimated tax payments to pre-pay the taxes on income that has not been subject to employer withholding, like wages. If you do not make estimated tax payments, you may have to pay an underpayment penalty when you file your income tax return if you have underestimated your potential tax liability by too much and you did not pay in enough taxes during the year. Estimated tax payments are made with Form 1040-ES, Estimated Tax Payment voucher.
For more information, visit the Small Business and Self-Employed Tax Center on the IRS website at www.IRS.gov. There are many IRS publications there that will help you and they are also available by calling 800-TAX-FORM (800-829-3676). Check out these publications and the instructions for the forms mentioned above:
• Publication 334, Tax Guide for Small Business
• Publication 535, Business Expenses
• Publication 505, Tax Withholding and Estimated Tax