Are you self-employed? Do you work as an independent contractor, or are you a sole proprietor of a business?

Self-employed individuals generally must pay self-employment taxes. Here are some facts that you should know about self-employment and the IRS:

1. Self-employment can be full-time or part-time. You may even have a regular full-time job and still be considered self-employed for the purposes of self-employment taxes.

2. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves, and you generally have to pay self-employment tax as well as income tax when you are self-employed.. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. When you file your Form 1040, you also file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business (also known as business expenses). These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. Business expenses must be both ordinary and necessary to be deductible. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information check out the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov. You can also call the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Daniel Stoica Accounting Professional

If you are self-employed, you most likely have to pay self-employment tax. Self-employment tax consists of Medicare and Social Security taxes for individuals who work for themselves and is similar to the Medicare and Social Security taxes that are withheld from the pay of most people who earn wages.

In order to figure self-employment tax, you should use Schedule SE (Form 1040).

You must pay self-employment tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. For church employees, your income needs to be $108.28 or more.

Generally, you must pay self-employment tax on net earnings from self-employment.  If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ to figure net earnings from self-employment.

If you have earnings subject to self-employment tax, use Schedule SE to figure your net earnings from self-employment.  Before you figure your net earnings, you generally need to figure your total earnings subject to self-employment tax.

Note: The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.

If you have questions about self-employment tax, consult with a tax professional.

Daniel Stoica Accounting Professional

According to most tax professionals, people often don’t realize that the income they earn from auctions and consignment sales are taxable.  The Tax Gap is the amount of tax that goes unpaid every year and  this blog will help taxpayers understand what income they need to report and the deductions they might be able to take.

The Tax Gap results from taxpayers under-reporting their taxable income. Most people know they have to pay their taxes, but most need a better understanding of their full obligations.

What Is Taxable?
Income from all auctions and consignment sales are taxable. But there are certain exceptions to this. The income is generally categorized as either business or ordinary income. This income may qualify for capital gain treatment. There are also some situations in which income is excluded from taxable income.

Business income earned from an auction or consignment is taxed just like earned income from any other retail or service business. This includes income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner has to include this income as business income.

A person must report money received from a sale whether it’s income from a business or not.  Reportable income is the income received that is above the original cost of the item. This money can be business income or capital gains.

Income resulting from auctions similar to a garage or yard sale is not required to be reported. However, there might be exceptions to this. If an online garage sale turns into a business with recurring sales and the purchase of items for resale, it is considered an online auction business.

Some people do sell products or services online as a hobby. This income must be reported, but expenses are limited in deductions. The deductions must not be more than the income and can only be taken if the deductions are itemized on your 1040, Schedule A, Itemized Deductions.

What’s a Deductible Expense?
Auction and consignment sellers are in the business of making a profit and can deduct expenses that are claimed as ordinary and necessary. An ordinary expense is one that is common in a business. A necessary expense is one that is helpful for a business. Auction and consignment fees and commissions that are verifiable are allowable business expenses.

Expenses related to personal, living, or family matters are not deductible. There are, however, expenses that are partly personal and partly business-related. The business portion of these expenses are the only ones that are deductible.

A common expense issue is a home that is also used for business. A person might be able to deduct expenses for the business use in their home if they use one part of their home exclusively for the business, generally referred to as an exclusive use requirement.

Auction and consignment sellers, however,  may figure their deduction to the expenses that relates to the space in the residence that is used on a regular basis to store inventory and/or product samples if the residence is the only location of their auction or consignment business. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

These rules can get tricky, so it’s a good idea to seek the advice of a tax professional to find out what you must claim as income and what you can and can’t deduct as an expense.

Daniel Stoica Accounting Professional

Tax Topic 416  Farming and Fishing Income

If you have income from your farming or fishing business, you may be able to avoid making any estimated tax payments by filing your return and paying your entire tax due on or before March 1st of the year your return is due.
This rule generally applies if at least 2/3 of your total gross income was made from farming or fishing in either the current or the preceding year. If March 1st falls on a weekend or legal holiday, you have until the next business day to file your return and pay the tax.

If you choose not to file by March 1st, you can make a single estimated tax payment by January 15th to avoid an estimated tax penalty.
If these special rules do not apply, you may have to make quarterly estimated tax payments.
For more information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Income and expenses from farming are reported on Form 1040, Schedule F (PDF).
Additionally, self-employment tax may be required if net earnings from farming are $400 or more.
Self-employment tax is figured on Form 1040, Schedule SE (PDF).
For additional information, refer to Topic 554, Self-Employment Tax.
For more information on farming, refer to Publication 225, Farmer’s Tax Guide.

Income and expenses from fishing are reported on either Form 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF).
Fishermen may also be required to file Form 1040, Schedule SE (PDF) to figure self-employment tax if their net earnings from fishing are $400 or more.
For general information about the rules applying to individuals, including commercial fishermen, who file Schedule C or C-EZ, refer to Publication 334, Tax Guide for Small Business.
Also see the article titled “Fishing Tax Center” on IRS.gov for additional information on fishing income, deductions, and other tax issues for commercial fishing.
If your trade or business is a partnership or corporation, see Publication 541, Partnerships, or Publication 542, Corporations.

Tax Topic 407 – Business Income

Business income is income received from the sale of products or services. For example, fees received by a professional person are considered business income. Rents received by a person in the real estate business are business income. Payments received in the form of property or services must be included in income at their fair market value.

Normally a business is organized as a sole proprietorship, partnership, or corporation. A sole proprietorship is an unincorporated business owned by an individual. A sole proprietorship has no existence apart from its owner. Business debts are personal debts of the owner. A limited liability company (LLC) with one individual owner generally is treated as a sole proprietorship for Federal income tax purposes, unless the owner elects to treat the LLC as a corporation. A sole proprietor files Form 1040 Schedule C (PDF), or Form 1040 Schedule C-EZ (PDF), (with Form 1040), to report the income and expenses of the business. A sole proprietor who had net earnings (from Schedule C or C-EZ) of $400 or more or had church employee income of $108.28 or more must file Form 1040 Schedule SE (PDF). Schedule SE is used to figure self-employment tax, which is the combined social security and Medicare tax on self-employment income. For more information on sole proprietorships, refer to Publication 334, Tax Guide for Small Business.

A partnership is an unincorporated business organization that is the result of two or more persons joining together to carry on a trade or business. Each person contributes money, property, services, or a combination thereof, in return for a right to share in the profits and losses of the partnership. A limited liability company with more than one owner is generally treated as a partnership for tax purposes. A partnership’s income and expenses are generally reported on Form 1065 (PDF), U. S. Return of Partnership Income, annually. No income tax is paid by the partnership itself. Each partner receives a Form 1065 Schedule K-1 (PDF), Partner’s Share of Income, Deductions, Credits, etc., which indicates the partner’s distributive share of partnership income, expenses, and other items, determined in accordance with the terms of the partnership agreement. For more information, refer to Form 1065 Instructions. For more information on partnerships, in general, refer to Publication 541, Partnerships.

The term “corporation”, for Federal income tax purposes, generally includes legal entities separate from the people who formed them under Federal or state law or the shareholders who own them. It also includes certain businesses that elect to be taxed as a corporation by filing Form 8832 (PDF), Entity Classification Election. The tax on a corporation’s income is figured on Form 1120 (PDF), U. S. Corporation Income Tax Return. Form 1120-A is now obsolete for tax years beginning in 2007. For more information on corporations in general, refer to Publication 542, Corporations. Corporations that meet certain requirements may elect to become S corporations, which are treated in a manner similar to partnerships. An S corporation files Form 1120S (PDF), U. S. Income Tax Return for an S Corporation, and is generally not subject to tax. Most income and expenses of an S corporation are “passed through” to the shareholders on Form 1120S Schedule K-1 (PDF), Shareholder’s Share of Income, Deductions, Credits, etc. The shareholders report on their income tax returns the amounts indicated on the Schedules K-1. For more information on S corporations, refer to Form 1120S Instructions.

Tax Tips for Self-employed Individuals

Self employed individuals in the trades or professions will greatly benefit from the following six Tax Tips for Self-employed Individuals.

IRS Tax Tip 2011-16, January 24, 2011

If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would file IRS Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit From Business with your Form 1040.

Here are six things the IRS wants you to know about self-employment:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay Self-employment Tax. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year.
4. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
5. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. In addition, you must be able to substantiate your expense..
6. For more information see IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at http://www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).