Tax Help for the Self-Employed

Being your own boss means not having to answer to anyone, right? Not exactly. In addition to yourself and your customers, you have tax obligations that require you to answer to the government about your income and expenses. The IRS considers you self-employed if any of the following apply:

• You are in business or carry on a trade as a sole proprietor or independent contractor.
• You are a member of a partnership that conducts a trade or business.
• You are in business for yourself, including part-time.

Having at least a basic understanding of tax laws and regulations is an essential part of being self-employed. While the focus of this guide will be federal tax requirements and obligations, remember that states — and in some cases, municipalities — also have requirements.

This guide is an overview and cannot address every possible tax situation and self-employment scenario, and it is not a substitute for professional guidance. Think of this guide as a starting point for understanding the nuances of your own particular tax status.

I. Tax Basics for the Self-Employed

Federal income tax returns can either be electronically filed online or filed on paper through the mail. E-filed returns are processed faster, and you receive your tax refund (when applicable) in as few as 10 days, versus up to six weeks for paper returns. A full discussion of the filing procedures can be found in our General Tax Guide.

Self-Employed Tax Statuses

Self-employment income can be categorized into two general types:

• Income derived from a business you own
• Income earned as an independent contractor of someone else

In either case, the forms you use to file your tax return depend upon your legal status as a business. Here are definitions for the business statuses pertinent to self-employed filers:

Sole Proprietorship – This status applies to individuals who own and operate an unincorporated business, or, in other words, a business that has not been granted an incorporated corporate status. Typically liability falls directly on the owner – who is often the sole proprietor.

Sole proprietors are required to attach either a Schedule C or a Schedule C-EZ to their 1040 tax return to report self-employment income.

If the business is jointly owned by a married couple , and meets the following requirements , it can be considered a “dual” sole proprietorship for tax purposes:

• The only participants in the venture are the husband and wife who file a joint return.
• The business is jointly owned by both spouses and is not an LLC or Partnership
• Both spouses must materially participate in the business.
• Both spouses must elect “qualified joint venture status” on form 1040.

In this instance, both spouses must file separate schedules C or C-EZ, with each spouse claiming their portion of income and expenses. This allows each spouse to claim their
share of social security contributions. This should not have any effect on the total refund for
the return.

Schedule C-EZ is a simplified version of the Schedule C and can be used if:

• Your expenses are less than $5,000
• You do not have any employees
• You do not have any inventory
• You will not be using depreciation or deducting the cost of your home.

Limited Liability Company – An LLC is a business entity formed under state laws that affords certain protections (consult an attorney for a list of those protections in your state). The IRS offers Limited Liability Companies (LLCs) some flexibility in how they are treated for tax purposes.

Single Member LLCs – An LLC with a single member can choose whether or not to be treated as a corporation. Single member LLCs that choose not to be treated as such are required to attach a Schedule C to their federal return. These businesses will often use the owner’s social security number rather than an Employer Identification Number on their return.

S-Corporations – Corporations are business entities that are created following state laws. An LLC that elects to be treated as a corporation must also decide whether or not to use the S election, which allows for income, losses, deductions, and credits to be passed through to shareholders for federal income tax purposes. An LLC that chooses this option is required to use form 1120S when filing their returns. A corporation, including S corps, must file a return regardless of whether it has income or not.

C-Corporations – These are LLCs that are treated as separately taxable entities by the IRS. C-corporations must use a form 1120 to file their federal tax returns and are subject to paying taxes at corporate tax rates, rather than at individual rates. Corporations, in some cases, may be subject to double taxation if corporate income is paid to owners as dividends that are then treated as personal income.

Partnerships – A business with two or more owners (including LLCs) may elect to be treated as a partnership. In a partnership, each person contributes money, property, labor or skills in exchange for a share of the business’s profits and losses.

Like S-corporations, partnership income, losses, deductions, and credits are passed through to the partners and reported on their individual returns. A partnership must file a return unless it had neither gross income nor paid or incurred any amount treated as a deduction or credit for tax purposes. Profits and losses from the business are reported to partners using the Schedule K-1; in addition, the partnership must also file a form 1065 for federal income tax returns.

Self-Employment Taxes

Being self-employed or an independent contractor is more than being your own boss. It means being your own employer — and being an employer comes with tax obligations and filing requirements that go beyond what a wage earner is responsible for. In this section we will run through some of the other taxes and filings that are required.

Social Security and Medicare (FICA) – Unlike wage earners, who have payroll taxes deducted from their gross pay to cover social security and medicare taxes, self-employed individuals who had earnings of more than $400 must complete a Self-Employment Tax form, Schedule SE, and attach it to their personal return. Self-employed individuals and independent contractors are responsible for both the employer and employee shares of social security and medicare. This rule applies to all types of businesses and must be paid even if you are already receiving social security or medicare.

Real Estate Income and Losses – Schedule E, Supplemental Income and Loss, is used to report income and losses from real estate. This form is attached to a form 1040 tax return for individuals reporting income or loss from:

• A real estate rental property
• Royalties
• Partnerships
• S-Corporations
• Estates
• Trusts
• Residual interests in REMICs

The Schedule E instructions include detailed information regarding which expenses are deductible against which types of reportable Schedule E income.

Farm Income – The business of farming is different from other types of self-employment in that it requires a specialized form for tax filing, the Schedule F. This schedule is used to report farm income and expenses and is attached to either the 1040, 1041, 1041NR, 1065 or 1065-B return. The IRS’s Schedule F instructions also include useful information about deductible expenses.

Due Dates

Filing deadlines or due dates for tax returns occur at different times for different types of returns. The final date for filing individual and partnership returns for the 2013 tax year are due by April 15, 2014. The tax filing deadline has not been extended due to the government shutdown, which is causing the IRS to delay the opening of tax filing by two weeks.

The forms and schedules listed above only refer to those used as part of your annual federal income tax filing and do not include any state, county or municipal returns required annually or quarterly.

Extensions and Payments – In the event you are unable to complete your tax return by the filing deadline, you are required to file a request for an automatic extension for individuals (form 4868) and a request for corporations (form 7004). Filing an extension does not extend the due date for payments and any taxes due should be paid with the application for extension.

All taxes owed are due in full with your completed return. Payments made after the filing deadline, regardless of whether or not an extension was granted, are subject to interest and penalties. However, it’s possible to request an installment payment agreement. Please refer to our General Tax Guide to learn more about that option.

Installments – In the event you are unable to pay any taxes due at the time of filing, you can complete IRS form 9465, which is an installment payment agreement request for amounts up to $50,000. The following fees apply when setting up an installment agreement:

• Direct debit agreement – $52
• Standard agreement or payroll deduction agreement – $105
• If your income is below a certain level – $43

Read the full guide at http://taxhelp.org/resources/self-employed/ .