What Are My Self-Employed Tax Obligations?

For this week’s tips we offer some information to consider regarding self-employed tax obligations from the IRS, what are SE Taxes and what are the obligations for individuals that are self-employed.

I Am Self-Employed, What Are My Self-Employed Tax Obligations?
Generally, a self-employed person is required to file an annual return and pay estimated taxes quarterly. 
Self-employed persons generally are obligated to pay self-employment tax (SE tax) as well as income tax.
What is SE Tax?
SE tax is a Social Security and Medicare Tax primarily for those individuals who work for themselves. It is just like the Social Security and Medicare Taxes withheld from the paycheck of most people that earn wages.
The IRS notes, “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).”
Therefore, before a Self-Employed person can determine if they are subject to self-employment tax and income tax, they must figure their net profit or net loss from their business.
This may be accomplished by subtracting business expenses from business income. If the expenses are less than the income, the difference is net profit and becomes part of income.  But, if expenses are more than income, the difference is a net loss. A net loss usually may be deducted from gross income, however in some situations the loss is limited.
A self-employed person should file an income tax return if your net earnings from self-employment were $400 or more and in most situations when earnings were less than $400 too.  

What Is The Difference Between Self-Employed And Small Business Owners – S Corp Saving?

By creating a corporation or a limited liability company, and making an S Corp election with the IRS, an individual may have some opportunities to reduce their self-employment tax liability.

With an S Corp, you can pay yourself a reasonable salary out of earnings, and either leave the remaining profits in the business or take it as a profit distribution. For Example  A sole proprietorship earns $100,00 for a year - then self-employment tax is due on the entire amount.  However, if a business is set up and eligible to make the S Corp election, then whatever amount exceeds the (reasonable) salary an individual takes is not subject to self-employment taxes.
Reducing Net Profit With An S Corporation
Net profit is equal to the gross revenue earned minus all deductible business expenses that were incurred. So, the lower a net profit number is, the lower the self-employment tax bill may likely be.
Therefore, you should be extremely thorough when preparing tax documents such as the Schedule C to ensure that every possible business expense will be deducted.  The business expenses need to be ordinary and necessary to operate the business to qualify as deductible. They cannot be personal expenses in nature. Common types of deductible business expenses include: office rent, supplies and equipment. 

Confused? Contact an accountant for specific questions and an individual response.

Wendy Ettorre