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).