If you have net profits as a self-employed individual, you may owe self-employment taxes. Self-employment tax is assessed at the same rate that an employer would use to deduct Social Security and Medicare taxes from your pay if you were a W-2 wage earner. The IRS imposes self-employment tax only when your net profits are above a certain amount. You do not owe any tax if your net self-employment income is negative.
If you're self-employed, you'll use IRS Schedule C, Profit or Loss from Business to report all your business activity. Your gross income includes all payments you receive from customers for services you provide. Include the amounts from any 1099s that customers send you at the end of the tax year. You'll also use Schedule C to categorize and claim business expenses you incur in the operation of your self-employment activities.
Net Income or Loss
The first step you'll need to take to determine if you owe self-employment tax is to figure your net income. From the gross income you report on Schedule C, subtract your expense total. The result is your net income or loss. As of January 2011, if your net profit is more than $400, use IRS Schedule SE to figure your self-employment tax. If your net profit is negative (a loss), you do not have any self-employment income and you do not owe any tax.
Self-employment tax is figured on IRS Schedule SE. When you file this form, the IRS shares the information with the Social Security Administration (SSA). The SSA uses information reported on your SE form to track your lifetime earnings and calculate your future Social Security retirement or disability benefits.
Estimated Tax Deposits
As of January 2011, if you owe more than $1,000 in self-employment tax in any tax year, you may be required to make estimated tax deposits towards your future tax liability. As a self-employed individual, you do not taxes withheld from your pay like W-2 wage employees. Your estimated tax deposits replace the tax credits that you would receive if you were not self-employed.
What Tax Forms Do You Need for Self-Employment?
Self-employed individuals have to pay the same taxes as people who work for a "boss," plus they have additional responsibilities, such as...
Why Do I Owe Taxes If I Am a Student?
The federal tax code is based on the amount you earn rather than your status. Accordingly, just because you are a student...
Do You Pay Self Employment Tax on a IRA Withdrawal?
Individual retirement accounts offer tax-sheltered savings for retirement. When you take a withdrawal, you will receive a Form 1099-R that will document...
How do I Pay Social Security Self-Employment Taxes?
Everyone who earns more than $400 a year must pay into Social Security, the government-run program that provides citizens with regular payments...
How to Claim Self Employment
People who are self-employed must pay the full amount of their Medicare and Social Security contributions. Half the cost is covered by...