Income Taxes for Self-Employed Business Owners and Independent Contractors
If you are not an employee and work on your own, you will pay taxes a little differently than employees do. Employers are required to withhold federal income tax (as well as Social Security and Medicare taxes) from their employees' pay. However, you are required to pay these taxes on your own, either through quarterly estimated tax payments or when you file your tax return at the end of the year.
The topics below will help you understand what you need to do to pay your taxes and file your return if you are self-employed:
Am I Required to File a Tax Return If I Have Self-Employment Income?
You are required to file a tax return if your total self-employment income is a least $400.
Why Am I Considered Self-Employed and Not an Employee?
Whether you are considered employed (an employee) or self-employed (business owner or independent contractor) depends on these three factors:
- Behavioral Control: How does the company or organization for which you work direct and control what work you do and how your work is done (using instructions, training, or other methods)?
- Financial Control: Who has the right to direct and control the business and financial aspects of your job?
- Type of Relationship: How do you and the business relate based on your work or job? Are there contracts that describe the working relationship between you and the company? How do these documents characterize your role in the business?
Refer to the chart below to find out whether you're an employee or self-employed taxpayer:
|Behavioral Control: The company or business controls the work you do and how the work is performed (i.e. what tools to use, what assistants to hire, when to purchase supplies or services). You also receive training and extensive supervision.
|Financial Control: The company has the right to direct and control all business and financial aspects of the job.
|Type of Relationship: It's expected to be permanent (or at least relatively long-term). You are also given employee benefits (insurance, pension, paid vacation, and sick pay). The services you provide are a key aspect of the regular business of the company.
- Business Owner-Schedule K-1 (If taxpayer owns a corporation, files 1120 business tax return via Schedule K-1)
- Independent Contractor-1099-MISC or receipts
|Behavioral Control: You direct and control your own work.
|Financial Control: You have the right to direct and control the business and financial aspects of your job. You may also have unreimbursed business expenses, invest in the facilities, equipment, or tools used in performing your job, make your services available to the open market, set your own rate and prices for services, taxes are not withheld from your pay, or have the possibility of incurring a loss.
|Type of Relationship: The services you provide are not a key aspect of the regular business of the company. The relationship may not be permanent and the company does not give you employee benefits.
A Quick Look - Taxes As An Employee vs. Self-Employed
||How Income is Reported
||How Taxes are Withheld or Paid
||Possible Forms to Include with Tax Return
||Taxes withheld via W-4 Form and paid with tax return if taxes are owed
|Self-Employed Business Owner
Note: Files 1120 business tax return via Schedule K-1 if they have a corporation
|Taxes paid via Quarterly Estimated Taxes and paid with tax return if taxes are owed
Schedule C or Schedule C-EZ
|Self-Employed Independent Contractor
||1099-MISC or receipts
||Taxes paid via Quarterly Estimated Taxes and paid with tax return if taxes are owed
Schedule C or Schedule C-EZ
When Am I Considered Self-Employed?
You are considered self-employed if you carry on a trade or business (not just a hobby). Self-employment is divided into two types of taxpayers: business owner and independent contractor.
What is a Business Owner?
If you control the type of work you do and the result of the work done, you are a self-employed business owner.
You are also considered a business owner if any of the following statements are true:
- You file a 1120 business tax return via Schedule K-1 efile it
- You are the sole proprietor of a business (registered corporation).
- You are a member of a business partnership.
- You are otherwise in business for yourself (whether full-time or part-time).
What Is an Independent Contractor?
Generally, you are considered an independent contractor if the person or organization that pays you has the right to direct and control only the result of the work and not what work will be done nor how it will be done.
What Are Examples of Independent Contractors?
Self-employed independent contractors include (but are not limited to): doctors, dentists, veterinarians, lawyers, accountants, public notaries, carpenters, electricians, plumbers, mechanics, stonemasons, home remodelers, housecleaners, lawn care providers, babysitters, newscarriers, software developers, web designers, graphic artists, entertainers, guest speakers, truckers, cab drivers, farm workers, interpreters, project managers, hairstylists, salespeople, freelance writers, etc.
What Is Considered Independent Contractor Income?
Independent contractor income is compensation you receive for doing work or providing services as a self-employed individual, not as an employee. If you are self-employed and an independent contractor, your compensation is reported on Form 1099-MISC (along with rents, royalties, and other types of income). If you received a 1099-MISC efile it instead of a W-2 efile it, the payer of your income did not consider you an employee and did not withhold federal income tax or Social Security and Medicare tax. A 1099-MISC means that you are classified as an independent contractor, and independent contractors are self-employed.
Am I Carrying on a Trade or Business?
A trade or business, in general terms, is an activity carried out to make a profit. Even if you don't actually actually make a profit, you are still carrying out a trade or business as long as your motive is to make a profit and you make regular, ongoing efforts to further the interests of your business. A trade or business may be full-time or part-time, and it may be carried out in addition to regular employment.
Am I Engaged In a Hobby?
A hobby is not a trade or business. If you carry on an activity that occasionally produces income, but your main purpose for pursuing the activity is not for profit, then you may be engaged in a hobby. Hobby income should be reported as "other income" on your tax return. If you itemize deductions, you can deduct hobby expenses up to the amount of your hobby income. See the tax return filing requirements to find out if your hobby income requires you to file a tax return.
I Am Self-Employed, So What Taxes Do I Have to Pay?
As a self-employed individual, you are responsible for paying income taxes and self-employment taxes.
What Are Self-Employment Taxes?
Self-employment taxes are paid in addition to regular income taxes. Self-employment tax is made up of Social Security and Medicare taxes.
How Do I File Self-Employment Taxes?
When you prepare your return on efile.com, you will be asked if you own a business or have received a Form 1099-MISC efile it, or a Schedule K-1 efile it. Based on the answers you provide, efile.com will help you report your business income and expenses by providing the forms that you will need and asking for the information that needs to be reported on each form.
A Schedule SE efile it is used to calculate your self-employment tax. We will generate the Schedule SE for you. You can also adjust any of the amounts on your Schedule SE that are automatically calculated if this is necessary.
Do I Have to Pay Estimated Taxes?
If you are self-employed, and you expect to owe $1,000 or more in tax when you file your return, then the IRS requires you to make quarterly estimated tax payments. Estimated tax payments are used to pay income tax and self-employment tax. If you do not pay enough tax through withholding and/or estimated tax payments to cover your tax liability, then you will be charged a small penalty by the IRS. The tax penalty is calculated on your tax return, and added to the amount you owe (or subtracted from your refund).
How Do I Pay Estimated Taxes?
You calculate and make estimated tax payments using Form 1040-ES efile it, which is really a booklet than a form. Use the included worksheet to figure the amount of your estimated tax payments. You don't have to send this worksheet to the IRS, but they recommend that you keep it for your records.
The booklet also contains four payment vouchers, which you can use to make your quarterly payments, if you are paying by check or money order. Just fill out the appropriate voucher and enclose it in the envelope with your check or money order made out to "United States Treasury". You can find the correct mailing address to use on the "Where to File..." chart included in the 1040-ES booklet.
Alternatively, you can make your estimated tax payments electronically online. You can pay online using a credit card, debit card, or electronic funds withdrawal. If you make your payments online, you do not have to mail vouchers to the IRS. To pay online, go to www.irs.gov/epay.
When Do I Pay Estimated Taxes?
You may have to pay estimated income tax four times throughout the year (quarterly) because you do not have taxes withheld from your pay by an employer. The quarterly tax payment periods for Tax Year 2017 are in the chart below:
|January 1 – March 31
|April 1 – May 31
|June 1 – August 31
|September 1 – December 31
||January 16 (of the following year)
When Will My Estimated Tax Payment Be Considered on Time If I Mail My Payment?
If you are making an estimated tax payment by mail, your payment will be considered on time if it is postmarked on the due date. If the due date falls on a Saturday, Sunday, or legal holiday, you will be on time if your payment is made on the next business day.
Can I Make More Than Four Estimated Tax Payments Per Year?
Yes, if you want to or need to make the additional payments. Just make a copy of a payment voucher or pay online. However, make sure that you pay enough by each due date to cover the preceding payment period.
Where Can I Find More Information Related to Self-Employment Taxes?