If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Key BASIC points about self-employment and self- employment taxes:
As a self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax.
You figure self-employment tax using a Form 1040 Schedule SE, and you can deduct in Form 1040 half of your self-employment tax.
You report your business transactions on Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business. The applicable Schedule in included with your Form 1040.
You have to make estimated tax payments on your self employment net profits above a threshold. If you are required but failed to make quarterly payments you may be penalized for underpayment.
You have to make an educated distinction between cost incurred that can be expenses from the ones that required to be capitalized over their useful life or after they are disposed off. (e.g., Merchandise inventory and equipment comes to mind.)
For an expense to be deductible, the itmem must be both ordinary and necessary; an ordinary expense is one that is common and accepted in your field of business, while a necessary expense is one that is helpful and appropriate to carry on in your trade or business.
For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, 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).
(Paraphrased)
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