Taxation Self Employment
Tax
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Self-Employment Tax and
Tax Payments
Self-employment tax (SE 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.
To be
self-employed, an individual
is normally highly skilled
in a trade or has a niche
product or service for their
local community. With the
creation of the Internet the
ability for an individual to
become self-employed has
increased dramatically.
To be self-employed is not
the same as being a business
owner: A business owner is
not required to be hands-on
with the day-to-day
operations of his or her
company.
If you're in business for yourself, or
carry on a trade or business as a sole
proprietor or an independent contractor,
you're considered self-employed.
Self-employed individuals are required
to pay self-employment tax by filing
Schedule SE along with Form 1040.
Estimated Tax
Estimated tax is the method used to pay
tax on income that isn't subject to
withholding. You generally have to make
estimated tax payments if you expect to
owe taxes, including self-employment tax
of $1,000 or more, when you file your
return. Use Form 1040-ES to figure and
pay the tax.
If you are self-employed you
must pay Estimated Taxes
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 can be
penalized for underpayment
at the end of the tax year.
IRS Publications and Forms for the
Self-Employed
Your business costs are usually
deductible if the business is operated
to make a profit.
You may be able to deduct expenses on
your home or car if you use them for
business.
Deferring your income to the next year
might be advantageous.
If you have employees, you must pay
employment taxes, including federal
income, Social Security and Medicare
taxes.
You may need to pay excise taxes if you
manufacture or sell certain products;
operate certain kinds of businesses; use
various kinds of equipment, facilities,
or products; or receive payment for
certain services.
For estimated tax purposes, the year is
divided into 4 payment periods. Each
period has a specific payment due date.
If you don't pay enough tax by the due
date of each of the payment periods, you
may be charged a penalty even if you're
due a refund when you file your income
tax return.
Business Expenses
To be deductible, a business expense
must be both ordinary and necessary. An
ordinary expense is one that's common
and accepted in your trade or business.
A necessary expense is one that's
helpful and appropriate for your trade
or business.
It's important to separate business
operating expenses from expenses used to
figure the cost of goods sold, capital
expenses and personal expenses.
Business Use of Your Home or Car
If you use part of your home exclusively
and regularly for business, you may be
able to deduct expenses for the business
use of your home. These expenses may
include mortgage interest, real estate
tax, rent, insurance, utilities, repairs
and depreciation. You can even deduct
the cost of your office furniture and
equipment.
Income Deferral
If you're self-employed and use the cash
basis of accounting (meaning all income
is included in the year it's actually
received), it may be advantageous for
you to defer some of your income until
the next year. For example:
Hiring the Family
If you have your own business, an
income-splitting opportunity is to put
your children on your payroll. What you
pay them is a business deduction for you
and earned income for them. You can do
this only if they actually work for you,
and you can't pay them more than their
services are actually worth. In
addition, the wages can be used as a
basis for funding your children's IRA
contributions, giving them a start on
retirement.
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