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Self-Employment Taxes Q&A

Q: Who is considered to be self-employed?

A: Anyone who

(1) engages in a business or trade to earn his or her livelihood or a profit,

 and

(2) has not created a corporation to do so.

The term includes:

  • farmers;
  • independent contractors (including lawyers, construction contractors and subcontractors, many computer programmers);
  • some members of the clergy and Christian Science practitioners, members of religious orders who have not taken a vow of poverty;
  • some members of fishing boat crews;
  • sole proprietorships;
  • some newspaper carriers; and
  • some public officials.

Q: May I work full-time for somebody and still be self-employed?

A: Yes. Self-employment may include paid work outside of your regular job, and some part-time work you do at home.

Q: What forms will I need?

A: Pick up these tax forms and instructions, or visit the IRS website:

  • Schedule C -- Profit or Loss from Business (Sole Proprietorship)
  • Schedule C-EZ -- Net Profit from Business (Sole Proprietorship)
  • Schedule SE -- Self-Employment Tax
  • Form 8829 -- Expenses for Business Use of Your Home (if you work at home)

You also may need Schedule F (Profit or Loss From Farming) or Form 4361 (Application for Exemption From Self-Employment Tax for Use By Ministers, Members of Religious Orders and Christian Science Practitioners).

Q: How do I pay my income taxes when I don't have an employer to withhold them?

A: You should probably start estimating your taxes and putting the money aside. See Form 1040-ES (Estimated Tax for Individuals) and its instructions for estimating payments to figure out how much you should be setting aside. A worksheet inside the instructions can help you. This is a good thing to talk to a tax professional about, because it will require some planning for the future. Also, if you don't estimate properly, you may be liable for penalties.

Q: When do I pay estimated taxes?

A: Generally, you pay estimated taxes four times a year, beginning on April 15, then payments must be made on (or the first business day after) June 15, September 15 and January 15 of the following year.

Q: I'm self-employed and pay for my own health insurance. Have the deductions improved any from the 50% that has been allowed?

A: Yes. Since 2003, self-employed individuals have been able to deduct the whole amount of health insurance.

Q: Where do I deduct the health insurance?

A: You deduct it "above the line," before you calculate your adjusted gross income.

Q: Now that I'm self-employed, I have been paying my estimated income taxes each quarter, and I seem to be paying a lot of money. Why is that?

A: When you are employed by somebody else, you have a certain amount of money deducted from your paycheck for Social Security tax and Medicare. (This might be referred to as "FICA" in your state.) That deduction represents one-half of the total employment tax. Your employer pays the other half. When you are self-employed, the tax laws will consider you half employer and half employee. You have to pay both parts of that whole tax, but you can get half of it back when you file your 1040.

Q: What are the different schedules for?

A: Cast yourself once again as both an employer and an employee. As an employer, you have tax responsibilities as a creator of income. As an employee, you have the tax responsibilities of a person who works for a living. Thus, as your employer, the income you create is a profit (or a loss), and you are entitled, just like any other for-profit business, to take deductions authorized for businesses. Schedule C or Schedule C-EZ is used to report your profit (or loss) and your business expenses to determine that. The result of that determination is part of your income as a person who works for a living. That's the part that gets reported on the front side of your 1040, which is the form for individual income tax.

Schedule SE is where you figure out how much you have to pay in employment taxes (for the trust fund, as opposed to income taxes for Congress).

Q: My spouse and I are both self-employed, but not in the same business. How do we report our income and expenses?

A: You both have to file your own Schedule SE. If you were employed, even for the same employer, you'd each be paying one-half of the employment tax on your own earnings.

Q: Is there any way I can avoid the self-employment tax?

A: Yes, but your options are limited:

  • You could get a job working for somebody else.
  • You could join a religious order that requires you to take a vow of poverty.
  • If you are a duly ordained minister or a Christian Science practitioner, you can apply for an exemption in which you state that you're opposed to public assistance because of your religious principles or your conscience.
  • If you are a member of a religious sect that is conscientiously opposed to insurance.

Q: My small side business really doesn't take in very much money. Do I have to go to all this trouble?

A: It depends. You do not need to file Schedule SE if your net earnings are less than a threshold amount. Your net earnings are the money you collect when you sell your goods or services. They do not include your expenses.

Q: How do I compute my deduction for the self-employment tax?

A: Use Schedule SE. After you have figured out how much tax you owe, as described in the previous question, you multiply it by 0.50 (50 percent), and that's your deduction. It goes on the front side of your 1040, before you determine your adjusted gross income.

Q: I operate two small businesses. Do I file two Schedules for the self-employment tax?

A: No. The information about your earnings may be combined on Schedule SE. Prepare and file a separate Schedule C for both of your businesses.

Q: What business expenses can I deduct, and where do I do it?

A: Use Schedule C or Schedule C-EZ. You can use Schedule C-EZ if your business expenses do not exceed $2,500. Keep track of (and retain records for) the following kinds of items (not everything is completely deductible, but keep track anyway so you can deduct the full amount you are entitled to):

  • Advertising.
  • Bad debts from sales or services.
  • Car and truck expenses (keep track of your mileage).
  • Commissions and fees you pay to somebody else.
  • Depreciation.
  • "Section 179" expenses.
  • Employee benefit programs, including a pension or profit-sharing plan.
  • Insurance, other than health insurance.
  • Mortgage interest.
  • Other interest.
  • Legal services.
  • Other professional services.
  • Office expenses.
  • Rent or lease of vehicles, machines, equipment.
  • Rent or lease of other business property.
  • Repairs and maintenance.
  • Supplies other than the cost of goods sold.
  • Taxes and licenses.
  • Travel, meals, and entertainment.
  • Utilities.
  • Wages.
  • Other expenses.

Q: Can I depreciate the computer I bought for my business?

A: Better yet, why not expense it? Depreciation is a rough measure of how much a piece of equipment loses value over time. In the case of a computer, as you know, the equipment ages very quickly. When you depreciate, you get to deduct a percentage of the value of the equipment each year. With a computer, you can deduct the entire value the first year. This one-year deduction of a piece of equipment is permitted under section 179 of the Internal Revenue Code, so it's called a "section 179 deduction." Get Form 4562 to claim the computer as an expense deduction. Note, however, that you may not be able to take the deduction under some circumstances, so you should probably talk to your tax professional.

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