Preparing federal tax returns can be frustrating at times, even for those most knowledgeable. If you are self employed, things can get even trickier. But, fear not. The following are six basic but important tips about income from self-employment that can help sole proprietors or independent contractors stay afloat in the business world:
- SE Income – In addition to income from your regular job, self-employment can also mean income received for part-time work.
- Schedule C or C-EZ – There are two required forms to report self-employment income: The Schedule C for profit or loss from business and the Schedule C-EZ, which reports net profit from business, along with the Form 1040. You may also use Schedule C-EZ if your expenses total less than $5,000 and meet other conditions. Click on the corresponding form link to see if you are eligible to use them.
- SE Tax – Making a profit means you have to pay income tax as well as self-employment tax, which includes social security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to find out if you owe this tax, which should be filed along with your federal tax return.
- Estimated Tax – Estimated tax payments, are typically done in four installments each year on income that is not subject to withholding. If you do not pay enough tax throughout the year, you may owe a penalty.
- Allowable Deductions – You can deduct expenses you paid to run your business 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 proper for your trade or business.
- When to Deduct – In most cases, you can deduct expenses in the same year you paid for them, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.
If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media.
Additional IRS Resources:
- Form 1040-ES, Estimated Tax for Individuals
- Publication 505, Tax Withholding and Estimated Tax
- Publication 334, Tax Guide for Small Business
- Publication 535, Business Expenses
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By: Kevin Hickman