Guide to Reporting Self Employment Income to the IRS
Everyone who has net income over $400 from self employment must report it to the IRS. This may include income from farming, baby sitting, a partnership or any other type of business where you physically participate in the business and earn wages other than from an employer who pays you and deducts taxes from your paycheck. When doing business for your self tax issues can complicated, so it is always advisable to hire a tax professional at very least a full charge bookkeeper who can get the ball rolling and start reporting for you.
The first thing that needs to be done when reporting self employment income to the IRS, is to send in estimated taxes. By sending in estimated taxes you will avoid getting penalties associated with making too much and not paying taxes on that income according to the proper time table associated with the amount you make. Social security and Medicare taxes for a self employed person equal 15.3% of the net self employment income. The estimated taxes are due to the IRS qaurterly. If you do not make very much money from your self employment you may not be required to do this, but come tax time you will be penalized for under payment if you made too much and did pay your estimaded taxes. Therefore, it is best to send in estimated taxes just in case.
Estimated taxes are due by the 15th of the month after the ending qaurter. Therefore, estimated taxes are due by April 15th, July 15th, October 15th, and January 15th. If the 15th of these months falls on a weekend then the payments are due the following Monday. In addition, an additional amount of a minimal 10% of net self employment income should be sent in to cover federal withholding taxes on the self employment.
If you are self employed and pay someone to do work for you under your self employement business, you must also send in their social security and medicare taxes for the wages earned from you. If they make under six hundred dollars you do not have to do this, they can do it. However, after the six hundred dollar limit, you must send in 15.3% social security and medicare taxes for them. Half of this amount 7.65% comes out of your pocket, the other 7.65% comes out of their pocket. These payments should also be made on April 15th, July 15th, September 15th and January 15th. Note, that if you do hire others to work for you, this will make you an employer and you must file for EIN (Employer Identification Number). The EIN should be used on all employee related forms such as W-2’s, 1099’s, and payroll taxes being sent in to the IRS for the employees.
If you want to know a more exact amount to pay for federal withholding taxes, you can go to IRS.GOV and search for the tax table in Publication 505 estimated tax and with holding.. Once you find the amount of income you have made with self employment, then you can look up the amount of taxes owed on that amount. Remember that this will be the amount owed on your net income. Therefore, you will need to deduct your expenses to figure out the right amount, or you can estimate. It is always safest though to never go below the 10% mark.
Other necessary forms publications related to self employement are publication 583 starting a business and keeping records, publication 541 for partnerships, if you have a partnership publications1518, 334, and 4591 can be useful. Publication 1518 is a tax calendar for the current year with important dates to meet IRS deadlines. Publication 334 is a tax guide. P publication 4591 is about responsibilities as a self employed tax payer. Form 941 is the form needed to report quarterly payroll taxes. If your self employment is in farming you need form F. For vehicle and asset depreciation associated with the business you need form 4562. If you use your home for your business or have a home office for the business you need form 8829. There are other forms and publications that may be needed in addition or if your entity doesn’t fall under these categories.
Once you have sent all your quarterly estimated tax payments in, then it is time to finish up you taxes and report your self employment income to the IRS. In order to report this income you will need a 1040 tax form, a SE (self employment) tax form and if you used you vehicle for business purposes you may need a form 4562 to report vehicle business uses. For further information on this you will have to read the instructions on vehicle deductions to see if you need this form. Otherwise, you may report vehicle uses in part two of the schedule c on line nine. Once you have you have collected all your necessary tax forms and filled them out, you can send in your taxes. Where you live will decide where to report your income. You can search the IRS.GOV website for where to send your taxes according to where you live.
Tax laws are always changing as well as tax tables. For this reason alone and the penalties that can be involved, it is always advised to hire a tax consultant. While a small business may be tight on funding, havinga tax consultant can get you started in the right direction and help make sure your set up and reporting everything you need to. This will help keep you from getting penalties, fines, and even audits. Additionally, once the consultant teaches you what you need to know you can always terminate their services. It’s in favor to have a tax consultant and remember their fee’s are an expense you can write off the business 100%.