A: Anyone who engages in a business or trade to earn his or her livelihood or a profit, and has not created a corporation to do so, is considered to be self-employed. Examples include farmers; independent contractors (including lawyers); some members of the clergy; and some public officials.
A: Yes. Self-employment may include paid work outside of your regular job, and some part-time work you do at home.
A: Pick up the following tax forms and instructions, or visit the IRS website:
You also may need Schedule F (Profit or Loss From Farming) or Form 4361 (Application for Exemption From Self-Employment Tax for Use By Ministers, Members of Religious Orders and Christian Science Practitioners).
A: You should probably start estimating your taxes and putting the money aside. This is a good thing to talk to a tax professional about, because it will require some planning for the future. Also, if you don't estimate properly, you may be liable for penalties.
A: Generally, you pay estimated taxes four times a year, beginning on April 15, then payments must be made on (or the first business day after) June 15, September 15 and January 15 of the following year.
A: Yes. Since 2003, self-employed individuals have been able to deduct the whole amount of health insurance.
A: You deduct it "above the line," before you calculate your adjusted gross income.
A: When you are employed by somebody else, you have a certain amount of money deducted from your paycheck for Social Security tax and Medicare. (This might be referred to as "FICA" in your state.) That deduction represents one-half of the total employment tax. Your employer pays the other half. When you are self-employed, the tax laws will consider you half employer and half employee. You have to pay both parts of that whole tax, but you can get half of it back when you file your 1040.
A: Cast yourself once again as both an employer and an employee. As an employer, you have tax responsibilities as a creator of income. As an employee, you have the tax responsibilities of a person who works for a living. Thus, as your employer, the income you create is a profit (or a loss), and you are entitled, just like any other for-profit business, to take deductions authorized for businesses.
Schedule C or Schedule C-EZ is used to report your profit (or loss) and your business expenses to determine that. The result of that determination is part of your income as a person who works for a living. That's the part that gets reported on the front side of your 1040, which is the form for individual income tax.
Schedule SE is where you figure out how much you have to pay in employment taxes (for the trust fund, as opposed to income taxes for Congress).
A: You both have to file your own Schedule SE. If you were employed, even for the same employer, you'd each be paying one-half of the employment tax on your own earnings.
A: Yes, but your options are limited:
A: It depends. You do not need to file Schedule SE if your net earnings are less than a threshold amount. Your net earnings are the money you collect when you sell your goods or services. They do not include your expenses.
A: Use Schedule SE. After you have figured out how much tax you owe, as described in the previous question, you multiply it by 0.50 (50 percent), and that's your deduction. It goes on the front side of your 1040, before you determine your adjusted gross income.
A: No. The information about your earnings may be combined on Schedule SE. Prepare and file a separate Schedule C for both of your businesses.
A: Use Schedule C or Schedule C-EZ. You can use Schedule C-EZ if your business expenses do not exceed $2,500. Keep track of (and retain records for) items such as advertising; depreciation; bad debts; legal services; office expenses; repairs and maintenance; and rent or lease of business property.
A: Better yet, why not expense it? Depreciation is a rough measure of how much a piece of equipment loses value over time. In the case of a computer, as you know, the equipment ages very quickly. When you depreciate, you get to deduct a percentage of the value of the equipment each year. With a computer, you can deduct the entire value the first year.
This one-year deduction of a piece of equipment is permitted under section 179 of the Internal Revenue Code, so it's called a "section 179 deduction." Get Form 4562 to claim the computer as an expense deduction. Note, however, that you may not be able to take the deduction under some circumstances, so you should probably talk to your tax professional.
If you work for yourself, you likely wear many hats. But you shouldn't be expected to fully understand taxes and to calculate what you owe. If you have questions regarding your self-employment taxes, it's a good idea to talk to an experienced employment lawyer in your area.
