Tax Tips for the Self-Employed

If you normally carry on a trade or business as either a sole proprietor or an independent contractor, you are self-employed for income tax purposes. If this applies to you, here are six important tax tips you should know:

Self-Employment Income. Self-employment income includes income you received for part-time work in cases in which you are not treated as an employee. This is in addition to income from your regular job.
Schedule C or C-EZ. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses of no more than $5,000 and meet certain other conditions. Please call if you are not sure which form to use.
Self-Employment Tax. If you made a profit, you may have to pay self-employment tax as well as income tax. Self-employment tax is the equivalent of Social Security and Medicare taxes paid by employers and employees. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, attach the schedule to your federal tax return.
Estimated Tax. You may need to make estimated tax payments. These payments are typically made on income that is not subject to withholding. You usually pay estimated taxes in four annual installments. If you do not pay enough estimated tax throughout the year, you may owe a penalty.
Allowable Deductions. You can deduct most expenses that 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. By law, even if they are ordinary and necessary, there are additional requirements that must be met before some types of expenses can be deducted, while other types may be partially or completely nondeductible.
When to Deduct. In most cases, you can deduct expenses in the same year you paid or incurred them. However, you must “capitalize” some costs. This means you can deduct part of the cost over a number of years.