Do you know if you are 'self-employed'?

Are you self employed?

Generally, you are if any of the following apply to you:

1. You carry on a trade or business as a sole proprietor or an independent contractor
2. You are a member of a partnership that carries on a trade or business or
3. You are otherwise in business for yourself (including a part-time business)

What are My Self-Employed Tax Obligations?

As a self-employed individual, generally you are required to file annually and pay estimated tax quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income 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. In general, anytime the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations you loss is limited.

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

How Do I File My Annual Return?

To file your annual tax return, you will need to use Schedule C or Schedule C-EZ to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Schedule C may be helpful in filling out this form. If you are a partner in a partnership, you must file a Form 1065 Partnership Tax Return and get a Form K-1.

Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C.

In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040), Self-Employment Tax. Use the income or loss calculated on you partnership K-1, Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare Taxes you should have paid during the year.

How Do I Make My Quarterly Payments?

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals, is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year's annual tax return in order to fill out Form 1040-ES.

Use the worksheet found in Form 1040-ES, Estimated Tax for individuals to find out if you are required to file quarterly estimated tax.

Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to re-figure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

Business Structures

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

Self-Employed Health Insurance Costs this Year
Under the Small Business Jobs Act of 2010, for tax year 2010, you can reduce your net self-employment income by the amount of your self-employed health insurance deduction on Form 1040.

State Tax Requirements

In New Hampshire, if your gross sales exceed $50,000 you are required to file a Business Profits Tax Return and pay a tax of 8.5% of your net profit, allowing for reasonable compensation to the owners. In addition, if your gross sales are over $150,000 or the total of Interest Paid, Dividends Paid, and Compensation Paid exceed $75,000, you are required to file and pay Business Enterprise Tax, a tax of .75% of the total interest paid, Dividends Paid and compensation paid.

Becoming 'self-employed' can become extremely cumbersome. Understanding what taxes you might owe is just the first part. What deductions are you entitled to? What hurtles are out there if you were to hire someone? As a 'self-employed' business owner you should know these answers and not wait until April 15 to find out, or worse, when you get a letter from a taxing authority asking for your tax return.

Steven A Feinberg, CPA of Appletree Business Services LLC, located in Londonderry, New Hampshire, has more than twenty five years experience in Federal and New Hampshire issues, specializing in small business general, tax and payroll matters. For additional information on these and other current business and tax issues, email Steve at info@appletreebusiness.com or call (603) 434-2775.

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