If you carry on trade or business as a sole proprietor, an independent contractor, or as a member of a partnership, S-corporation or Limited Liability Company, you are considered by the IRS to be self employed. If you are in business for yourself in any other way than that just described you may also be considered self employed for tax purposes.
You are required to report all self-employment income on a form 1040 tax return if your gross income from all sources is at least as much as the filing requirement for your filing status and age. In addition, if your net income from self employment exceeds $400 for the tax year, you will be required to pay self-employment tax.
The forgoing paragraphs are a summary of information extracted from IRS publication 17 (Your Federal Income Tax) concerning self employed persons. It seems pretty straight forward, but there are a lot of elections and other factors that can complicate matters. For instance, certain types of income such as capital gains and passive income are not considered self-employment income for self employment tax purposes, but are still subject to other income tax rates. In addition, since self employed persons are considered to be in business there are certain ways to shelter income from taxation unavailable to employed persons. For this reason, it is a good idea for any self-employed person to consult with a tax professional.
Self-employment income from a sole proprietorship or husband and wife joint venture when filing a joint return, is reported on form 1040 Schedule C, or if the business is a Farm, 1040 Schedule F. Schedules C and F are essentially income and expense (I&E) schedules listing all sources and types of income as well as business expense deductions. There may be additional IRS forms required to support certain entries on schedule C and F, such as 4562 Depreciation and Amortization, 4797 Sale or Other Disposition of Business Assets, 8829 Business Use of Home and so on.
All other self-employment income including guaranteed payments and member or partners distributive share of profit or loss from partnerships, S-corporations and Limited Liability Companies is reported to the taxpayer on Schedule K-1 and reported on form 1040 Schedule E. The net income amounts from schedules C,F and E are carried to the corresponding lines of form 1040. Note: if schedules C,F and E are required to report self employment income, only the long form 1040 version can be used.
In addition, if the net amount of income from “non-farm” self-employment is greater than $400 the taxpayer is required to calculate and pay self employment tax. The SE tax rate is 15.3 % and includes both the individual’s and businesses (employer) contributions to social security and medicare. Self employment tax is calculated and reported on Schedule SE. Only the first $106,800 is subject to social security tax and one half of the total self employment tax is deductible as an adjustment to income on form 1040. If husband and wife file as sole proprietors each must report half of the income for self employment tax purposes, thus, in this cases up to $213,600 may be subject to self employment tax.
It the total income tax due on the tax return exceeds $1000, including self employment income and all other sources, the tax payer may be required to make quarterly estimated tax payments the following year. There are so many factors coming into consideration with respect to estimated taxes, that individuals who find themselves in this situation are well advised to get help from a tax professional.
When it comes to self employment income, there are a whole lot of issues and elections the self employed taxpayer should be aware of. Of course, such folk are usually pretty busy taking care of other aspects of their business to keep up with the ever changing tax code and that is where regular consultation with a tax professional can become invaluable in minimizing their tax liability. There’s not a whole lot that can be done after the books are closed on the last day of the tax year and the self employed person shows up at their tax preparer’s office with a shoe box full of receipts in hand.