Tax Tips for the Self-Employed
If you are self-employed, benefits can be bountiful. Self-employment is generally categorized as anyone who works for themselves as an independent contractor, or carries on a trade name or business as an independent owner.
The IRS illustrates these six imperative points for those who are self-employed to understand the concepts surrounding self-employment and self-employment taxes.
- Being self-employed may consist of additional work outside of your full time business duties. These duties include part-time work needing to be done at home or in addition to your regular job.
- In addition to income tax, being self-employed can add an additional tax. This tax or the self-employment tax is a Social Security and Medicare tax imposed on those individuals who chose self-employment. This tax is consistent with Social Security tax and Medicare taxes that would be deducted from regular wage earnings. By using Form 1040 Schedule SE, you can calculate the self-employment tax. An alternative method is deducting half of your self-employment tax in figuring your adjusted gross income.
- Included in Form 1040 should be your IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business.
- Self-employment could infer you to make estimated tax payments. The purpose of estimated tax is to collect tax on income that is not subject to withholding. Therefore, even if you also hold a full-time or part-time job where your employer taxes your wage, estimated tax payments still apply. Failure to make quarterly payments could result in penalization for underpayment at the duration of the tax year.
- Business expenses are costs that can be deducted at the end of the tax year for running your business. These expenses do not have to be capitalized or included in the cost of the goods sold; rather they can be deducted at the end of the year.
- The test for whether expenses are deductable expenses is whether they are both ordinary and necessary. An ordinary expense arises from the everyday cost it takes to run your business and specific to your field. A necessary expense test is met if the item is applicable and helpful to your business. A necessary expense does not need to be indispensible to be accepted.
Additional information can be found at the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Businesses, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
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