If you are self-employed, you normally carry on a trade or business. Sole Proprietors and independent contractors are two types of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips from the IRS:
1. SE Income. Self-employment can include income you received for part-time work. This is in addition to income from your regular job.
2. Schedule C or C-EZ. You must file a Schedule C, Profit or Loss from Business, or Schedule CE-EZ, Net Profit from Business, with your 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet certain other conditions.
3. SE Tax. You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes.
4. Estimated Tax. You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You usually pay estimated taxes in four annual installments. If you do not pay enough tax throughout the year, you may owe a penalty.
5. Allowable Deductions. You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful to your trade or business.
6. When to Deduct. In most cases, you can deduct expenses in the same year you paid, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part part of the cost over a number of years.
Other recommended reading: Tax Changes Summary