IRS Determination of Self-Employment and Your Obligations

One thing you can count on when it comes to the IRS is that they offer plenty of online and print resources to help you to make certain that you are meeting your tax obligations.i This applies for determination of whether you are considered self-employed for tax purposes and your tax obligations if so.

Who does the IRS consider as self-employed individuals?

The general determining factors for IRS classification as self-employed include:

  • If you do business or a trade as a sole proprietor or an independent contractor.

  • You are a member of a partnership that carries on a trade or business.

  • You are otherwise in business for yourself, including part-time.

Any one of these would cause the IRS to consider you as a self-employed individual.

Your tax obligations as a self-employed individual.

The two main requirements for a self-employed individual are to file an annual business tax return and to pay quarterly estimated payments. The estimated payments cover your liability for income taxes and self-employment tax. The self-employment taxes include payments into Social Security and Medicare.

Your self-employment tax (Social Security & Medicare) is calculated on your net profit from your business operations. Subtracting your expenses from income yields net profit, and the self-employment tax owed is levied on that amount. You must file an income tax return for the business if your net earnings from the business are $400 or more. Check the instructions on Form 1040 or Form 1040-SR to see if there are other reasons that would require filing even if earnings are less than $400.

Your quarterly payment requirements:

As a self-employed individual you have no employer withholding your income tax, Social Security, or Medicare taxes during the year from wages. You must use an estimated tax amount to send in quarterly payments to the IRS. Form 1040-ES, Estimated Tax for Individuals, is the form you use to calculate your estimated taxes and the amount to send in quarterly.

Using your previous reported annual income and tax liability, you then send in one quarter of that amount with quarterly tax vouchers that are a part of the 1040-ES. You can optionally make your payments through the EFTPS, Electronic Federal Tax Payment System. If it is your first year of self-employment, you will need to come up with an estimate of the income you will make.

Filing your annual tax return.

You file your annual self-employment income tax return using Schedule C to report your income or loss from a business or profession you practiced as an independent contractor or sole proprietor. You use Schedule SE, Self-Employment Tax, to report your Social Security and Medicare tax liability.

Tax advantages of self-employment.

There are deductions for expenses you incur in the operation of your business. They can include writing off the cost of your vehicle for its use in the business, a home office deduction if your space qualifies, as well as other retirement account structures. Consult a business tax professional to plan a new business as a self-employed individual.

i Self-Employed Individuals Tax Center, IRS website.

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