The self-employed have countless advantages that come with being their own bosses. Working for yourself, as an independent contractor, or as a sole proprietor, earns you the title “self-employed.” The IRS offers some key tips for the self-employed about self-employment taxes:
- Self-employment includes work you do in addition to your fulltime business, or income generating activities; it includes part-time work you do at home or as a bonus to the regular employed job.
- The self-employed have to pay self-employment tax in addition to the regular income tax. The self-employment tax is a form of Social Security and Medicare tax fundamentally for persons who work for themselves. In many ways, it is like the Social Security and Medicare taxes in remission from the pay of most income earners. Form 1040 Schedule SE if used to compute self-employment tax. You can deduct an employer’s equivalent portion of your self-employment tax in figuring your adjusted gross income. In previous years, the deduction was equal to a half of self-employment tax.
- Form 1040 is used to file an IRS Schedule C, details of profit or loss from your business, C-EZ, and net profit from business.
- When self-employed, one sometimes has to make estimated tax payments. This is applicable even if when on a full-time or part-time job, and the employer withholds taxes from the regular income. This estimated tax method is used to pay tax on income that is not subject to withholding. Failure to make quarterly payments can lead to underpayment penalties at the end of the tax year.
- Self-employed people incur costs when running their businesses. These are known as business expenses and are subject to deductions. These costs must be recurrent in nature.
- For a business expense to qualify to be deductible, it must be both ordinary and necessary. An ordinary expense is one that is universal and accepted in your domain of business. A necessary expense is one that is supportive and fitting for your business. An expense does not have to be indispensible to be considered necessary.
The IRS has more on these details from the Self-employmentTaxCenterin IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses, and Publication 505, Tax Withholding and Estimated Tax. One can visit their website www.irs.gov, or call 800-TAX-FORM (80-829-3676).