IRS Tax Tips for Self Employed individuals

Key points the IRS would like you to know about self-employment and self- employment taxes:

Who is considered to be Self-employed
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.

Part-time or Full-time work

Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

Self-Employment Tax

If you are 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 primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

Where you are required to report your Income and expenses?

You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

Estimated Tax PaymentsIf you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on net income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

Cost of running your Business

You can deduct the costs of running your business. Some cost will be capitalized, others deducted in its entirety depending on many factors.  Some business expenses are clasiffyed as part of the cost of goods sold, report as inventory and/or as an asset and portion of these could be expensed in the current year.

What determine its deductibility?

For a cost of running a business be deductible, the business expense must be both ordinary and necessary in carry on a business. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Source of additonal information:

Contact your CPA, and/or 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).

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