This post is part of the series, SmallBusiness.com Guide to Taxes: Information about taxes, tax preparation and filing. You can browse other posts in the series below.
Individuals in the U.S. who have income as a sole proprietor or independent contractor (or any other term applied to a small business comprised of one person) are responsible for paying income taxes related to self-employment. Here are five independent-worker (self-employed, etc.) tax-related items the IRS recommends you be aware of. They link to more information found on the tax agency’s website. As always, we will remind you: Seek professional advice from trusted advisors when you are dealing with issues related to finances, taxes or the law.
First: Do you have income subject to the self-employment tax? The IRS has a self-guided “online interactive interview” that will help you determine whether or not you do.
1 | Estimated Tax
Self-employed taxpayers generally need to make quarterly estimated tax payments. IRS Publication 505, Tax Withholding and Estimated Tax, has details on making those payments.
2 | Schedule C or C-EZ
Self-employed taxpayers must file a “Schedule C, Profit or Loss from Business” or “Schedule C-EZ Net Profit from Business” with their Form 1040. For expenses less than $5,000, use Schedule C-EZ. Each form’s instructions provide the rules for which form to use.
3 | Self-Employment (SE) Tax
For those making a profit, self-employment and income tax may need to be paid. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE to figure the tax.
4 | Allowable Deductions
Taxpayers can deduct expenses paid to run a business. Expenses are described as either “ordinary” or “necessary.” An ordinary expense is one that is common and accepted in an industry. A necessary expense is one that is helpful and proper for a trade or business.
5 | When to Deduct
In most cases, taxpayers can deduct expenses in the year paid or the year incurred. Some costs must be ‘capitalized,’ however. This means deducting the cost over a number of years.
More advice from the IRS
All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
Additional IRS Resources
- Form 1040-ES, Estimated Tax for Individuals
- Publication 505, Tax Withholding and Estimated Tax
- Publication 535, Business Expenses
- Do I have Income Subject to Self-Employment Tax?