Self Employment Tax Laws

More people are joining the ranks of the self employed. Working for yourself is considered the same as running your own business, regardless of the trade or profession. While this work style allows for flexibility and convenience, the one major drawback is the added tax preparation and payments required under law.

Identification

While self employment may have its perks in terms of convenience and autonomy, the tax requirements are anything but perks. Working as an independent contractor, or operating a trade, business or profession are all areas where self employment tax laws apply. Any generated income over $400 must be reported to the Internal Revenue Service (IRS). Paying taxes as your own employer and employee means you're fulfilling two different roles within the workforce, so the tax liability is higher.

Function

Our Social Security system is financed through employment taxation. Employment tax is half employer-paid and half employee-paid. Those who work for an employer or company have taxes deducted by the employer. The employer then matches their tax contribution and sends it to the IRS. Self employment tax laws assign both tax portions to the person who works for himself. As a result, a number of forms are required to report earnings, deductions and expenses.

Features

The amount of money you earn will determine how much you'll pay for self employment taxes. The task of setting aside a certain portion of income should be done every time money is made. The IRS does provide a way for you to offset the required employer tax portion. A 1040 form must be filed in order to get this money back. Other required forms include Schedule C, Schedule C-EZ, Schedule SE and Form 8829. Schedule C records your profits and losses, Schedule C-EZ records your net profit, Schedule SE is the actual self employment tax form and Form 8829 is used to list your business expenses.

Effects

The different forms record your income activity as an employer and an employee. As with any other employer, any business-related expenses can be listed as deductions. These include the costs required to operate a home office, transportation and some utility costs. As of 2003, self employed individuals can now deduct the full cost of health insurance, as opposed to the 50 percent allowance of previous years. Estimated taxes owed are paid four times a year: April 15th, June 15th, September 15th and the last payment is due by January 15th of the next year.

Considerations

Allowable deductions for business expenses vary depending on the type of work you do. Schedule C is used if your expenses total over $2,500. Anything under that amount can be reported on Schedule C-EZ. While not all expenses are deductible under self employment tax laws, it's best to keep track of everything so you won't miss out on allowable deductions. For larger pieces of equipment, depreciation factors only allow you to deduct a percentage of the value each year. However, the full value can be deducted as an expense during the first year, which means you can only deduct it one time.

Resources

• Self Employment Resources & Services - Government Site
• Internal Revenue Service - Self Employment Tax Guidelines