Self-employment can be a liberating experience. You get to make your own rules, work your own hours and say goodbye to the horrors of a demanding boss. With this freedom comes responsibility and handling all your business affairs now solely rests on your shoulders, including paying your own taxes. A recent Ledyard-Patch article entitled Self-Employed? IRS Says You Should Read This reminds us that the self-employed are urged to get the best IRS tax help and understand their tax responsibilities in order to avoid any future tax problems from the get-go. The following four questions provide simple, basic information the IRS would like the self-employed to know:
Who is considered self-employed?
If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are typically considered by the IRS to be self-employed. Generally, your net earnings from self-employment are subject to self employment tax. To avoid IRS tax issues, you must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies:
- Net earnings from self-employment (excluding church employee income) were $400 or more.
- You had church employee income of $108.28 or more.
What is self-employment tax and what is the rate?
If self-employed, you are obligated to pay self-employment tax as well as income tax. The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security=old-age, survivors, and disability insurance, and 2.9% for Medicare=hospital insurance).
What are estimated tax payments?
Estimated tax is the method used to pay tax on income that is not subject to withholding. If you are self-employed, you should be making estimated tax payments quarterly. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. If you fail to make quarterly payments you could be facing IRS penalties for underpayment at the end of the tax year.
What deductions are allowed for self-employment?
If you are self-employed you are able to deduct the costs of running your business. These costs are known as business expenses. To be deductible, a business expense must fall into two categories; ordinary and necessary.
- An ordinary business expense is defined as being common and acceptable for a particular field of business.
- A necessary business expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
It is typically not allowed to take personal, living or family deductions for a business enterprise. However, if you have an expense for something that is used partly for business and partly for personal purposes, you can divide the total cost between the business and personal parts and take the deduction, but be warned. Too many business deductions can raise red flags and bring on the anguish of an IRS tax audit.
If you require further information, the IRS website is a good place to start for basic answers. If more in- depth information is required, you are advised to consult a professional tax advisor to assess your tax needs let you know what your options for IRS tax relief are.
More Tax Help, IRS News and Tax Relief Tips:
- Michael Rozbruch Interviewed in Opportunist Magazine
- Ask the Certified Tax Specialist – Small Business Back Taxes
- IRS Practices Scrutinized This Tax Season
- New Offer in Compromise Policies Bring Tax Relief
- IRS Holds Taxpayers Responsible – No Matter What
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