Self-Employment Tax Filing Guidelines
Understanding self-employment taxes and the IRS requirements that come with self-employment can be confusing. Tax preparers and self-employed persons should take a moment to consider the specifics of self-employment taxes before filing a tax return.
Self-Employment Tax Obligations
Self-employed people must pay estimated quarterly taxes and file an annual tax return. Generally, self-employed people pay an Employment Tax (Social Security And Medicare) in addition to income tax:
1. SE tax is assessed to enable self-employed people to access Social Security services (including disability income) and Medicare.
2. Employment tax almost always refers to Social Security and Medicare taxes and not income tax.
Self-Employment Tax Determinations
A Business is subject to SE tax and income tax requirements, determine the net profit/net loss from the business activity:
Calculate the net profit or net loss:
- Subtract business costs and expenses from business income.
- If expenses are smaller than income, the result is net profit. Record this income on page one of IRS Form 1040.
- Alternatively, if expenses are greater than income, the result is a net loss. Deduct this loss from total (gross) income on page one of IRS Form 1040.
- Net earnings of USD 400 or higher must be reported on the taxpayer’s income tax return.
- If self-employment net earnings are less than USD 400, the taxpayer must submit an income tax return if filing requirements listed on IRS Form 1040 apply.
Quarterly Self-Employment Taxes
Because self-employed people don’t have an employer to withhold taxes from them, he or she must pay estimated taxes. Review IRS Form 1040 EZ to compute self-employment taxes:
- IRS Form 1040-ES (Estimated Tax For Individuals) is needed to calculate self-employment taxes. A worksheet is included (similar to IRS Form 1040). Refer to the last tax year return to complete Form 1040-ES.
- Completion of IRS Form 1040-ES is needed to determine if the individual or partnership is required to pay quarterly estimated tax.
- If required to pay quarterly self-employment taxes, use blank vouchers provided in Form 1040-ES. Make payments via the Electronic Federal Tax Payment System (EFTPS). If considering the first year of operations, estimate the annual income expected.
- If estimated quarterly payments are greater than actual income, complete a new Form 1040-ES to compute the next quarter’s estimated self-employment taxes.
- If estimated quarterly payments are lower than actual income, complete a new Form 1040-ES to project estimated tax for the next tax quarter.
Self-Employment Annual Tax Return
Use Schedule C or Schedule C EZ to document net profit or loss from self-employment. Review Schedule C instructions before filling out the form:
- Small businesses (or statutory employees) with USD 5,000 or less in expenses should consider Schedule C-EZ. Review instructions of Schedule-EZ to determine if the business can use this form.
- File Schedule SE of IRS Form 1040 to pay self-employment tax. Use the figure (profit or loss) on Schedule C/Schedule C-EZ to figure the Social Security/Medicare taxes to pay.
- Calculate Security And Medicare Tax By Taking Your Net Income And Multiplying It By 15.3%. (Ex. 10,000 net x .0153 = $1530 Tax).