Self Employed Individual and Income Tax

 

When you are self employed or otherwise have your own business, it creates a few additional federal income tax issues and responsibilities that you must account for beyond those required for an individual.  Therefore, before you file your taxes with the Internal Revenue Service (IRS), you need to be sure to consider these issues.

As with a normal individual, even though you are self employed, you still need to file a federal income tax return annually if your earnings from self employment are $400 or more.  In addition, as a self employed person, you must also account for the following depending on your net profit or net loss:

Estimated quarterly tax.  Since an employer does not withhold federal income tax from every paycheck for you as is the case with an employed individual, self employed individuals must pay an estimate of federal income tax quarterly.

Self employment tax.  Self employment tax is essentially a Social Security and Medicare tax for self employed individuals, like those taxes paid by employed individuals.  Again, since a self employed individual does not have an employer to withhold the Social Security and Medicare taxes, the self employed individual must pay the Social Security and Medicare tax as a part of the estimated quarterly tax payment to the IRS.

A self employed individual can submit a quarterly tax payment to the IRS by using Form 1040-ES.  Form 1040-ES is designed specifically for calculating an estimate of quarterly tax.  The basis for the estimate of quarterly tax is in part the Form 1040 you filed in the prior year related to your business; therefore, you will need your prior-year Form 1040 to submit an accurately estimated Form 1040-ES.  If this is the first year you have been self employed and you therefore do not have a prior-year Form 1040 with income related to your business, you must estimate your income for the entire year to accurately calculated Form 1040-ES.

Once you have calculated an estimate for your quarterly tax payment, you can submit your tax payment to the IRS through the mail using the payment vouchers included with Form 1040-ES or using the IRS’ Electronic Federal Tax Payment System (EFTPS).

When it is time to file your annual income tax return, the specific form you must use depends on the type of business structure you are using for your business.  Examples of common business structures include sole proprietorships, partnerships, corporations, S corporations, and Limited Liability Companies (LLCs).  Additional information on each of these business structures and the required federal income tax return forms is available here on the IRS’ web site.

In addition, you must include Schedule C, which is used to calculated the profit or loss from a business.

If you are self employed and need help with your federal income tax, whether simply to answer questions or because the IRS has already contacted you with concerns about your tax return, you should seek the help of a tax attorney.  A tax attorney knows the tax code in detail specifically for the purpose of helping individuals deal with issues that have legal ramifications if those issues are not addressed properly.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.