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Self-Employment Tax Obligations: Everything You Need to Know

Self-Employment Tax Obligations: Everything You Need to Know

According to IRS, when a person runs a business as a sole proprietor, LLC owner, or partner in a partnership he is considered as a self-employed individual. The formal business structure is not a requirement, you are mandated to report your business taxes on Schedule C with your personal tax return.

Generally, a self-employed individual is required to file an annual return and pay estimated tax quarterly. Self-employment (SE tax) only refers to Social Security and Medicare taxes and not any other tax, it is prime duty of individuals who work for themselves. It is the same with Social Security and Medicare taxes withheld from the pay of most employees. In determining if you are subject to self-employment tax and income tax, you need to figure out whether you have a net profit or net loss in your business. Profit or loss is business income minus your business expenses. Net profit if your expenses are less than your income, and it becomes part of your income on page 1 of Form 1040. It is a net loss if your expenses are greater than your income. Usually, net loss can be deducted from gross income on page 1 of Form 1040. See Publication 334 is Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).

If your net earnings from self-employment were $400 or more you have to file an income tax return. If net earnings were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.
Quarter Payments

Estimated Tax for Individuals, Form 1040-ES is required to be filed to find out if you need to file quarterly estimated tax. It contains a worksheet and blank vouchers similar to Form 1040 you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). You will be needing your previous year’s annual tax return in order to fill it out. Estimated tax is the method used to pay Social Security and Medicare taxes and income tax since you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals (PDF), is used to figure these taxes.

For first time filers, you’ll need to estimate the amount of income expected to earn for the year. If your estimated earnings are too high, complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If your estimated earnings are too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
Filing of Annual Return
In filing the annual tax return, net income or net loss from your business operation or from professional practice must be reported using Schedule C (PDF) or Schedule C-EZ (PDF).

Small businesses and statutory employees with expenses of not more than $5,000 may file Schedule C-EZ instead of Schedule C.  In reporting your Social Security and Medicare taxes, file Schedule SE (Form 1040), Self-Employment Tax (PDF). Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year.

Many people today work harder by having two jobs - as an employee and also self-employed. But having these two sources of income means two forms of payroll taxes.

Calculation process for self-employment tax on Schedule SE, for a person with two sources of income (employment and self-employment):

  • Net income from your business during the year is entered.
  • Next, the amount of self-employment tax owed is calculated.
  • Then, any income from employment and the amount of Federal Insurance Contributions Act (FICA) tax is considered.
  • Lastly, the amount already paid from your employment is deducted from the total Social Security/Medicare tax owed. If there is anything left, it is due to self-employment tax, on your personal tax return.

The freedom of self-employment comes also the sole responsibility for paying taxes. In addition to income taxes, you are required to collect and pay sales tax, a state-mandated surcharge which also varies from state to state. Business owners must check with state government if they must charge customers sales tax for their products or services. For a reason that if you are supposed to have collected taxes and you don’t, then you will personally liable on the sales tax you should have collected but didn’t. It does not matter whether you filed as a sole proprietor, partnership or a corporation, you have to pay estimated federal and state taxes on profits from the business.

Finally, if you have employees on your payroll and that includes you, payment for the standard payroll taxes on salaries must also be paid.

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