Tax Tips for the Self-Employed
If you are a self-employed, you normally carry on a trade or business. Sole proprietors and independent contractors are two types of self-employed individuals. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return:
- Self-Employment Income. Self-employment includes income you received for working as an independent consultant as well as from running your own business as a proprietorship. If you are also employed, this income is in addition to the income from your 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 less than $5,000 and meet certain other conditions. Please call us, if you are not sure whether you can use this form.
- Self-Employment Tax. If you made a profit, you may have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. 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 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.
- 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.
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