Self-Employment Taxes

Determine your net income (profit)

Once you determine you’re self-employed and had income, you need to determine your net profit from the business. This is done by taking all your businesses income and subtracting any expenses or losses. Some businesses have a profit and loss statement that they generate throughout the year.

Generally, if your business(es) had a net loss (your expenses are more than your income) for the year, you aren’t subject to self-employment (SE) tax.

Calculate your SE Tax

Once you determine the net profit from all your businesses, you’re ready to compute your SE tax, using IRS Schedule SE, (IRS Form 1040) Self-Employment Tax. The form will walk you through the calculation for the SE tax, since different lines are used for different types of income. The schedule also helps you calculate the deduction you’ll take for the one-half of the SE tax. Enter the calculated SE tax on Schedule 2 (Form 1040) and use Schedule 1 (Form 1040) to claim the on-half (50 percent) of SE tax deduction. Finally, include all IRS Schedules (Schedule SE, Schedule 1, and Schedule 2) when you send your tax return to the IRS.

The IRS instructions for the Schedule SE are a good source for understanding the special rules.

If you believe you’ve been incorrectly classified as an independent contractor, you can file a form with the IRS to correct this. Form 8919, Uncollected Social Security and Medicare Tax on Wages, Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report your share of uncollected Social Security and Medicare taxes. You may also need to file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding to request a status determination.

Quarterly Taxes

If you’re subject to SE tax and income tax, you’re generally required to file an annual return and pay estimated tax quarterly. It is important to look at your business profit and loss during the year to find out if you need to make estimated payments. If it looks like you’ll be paying SE tax, you’ll likely need to make the payments. You could be subject to a penalty if you don’t have enough withholding or estimated payments on your account.

Social Security

It is very important to report all your self-employment income properly and pay the SE tax. The SSA uses this information to calculate your benefits. If the information is not correct, it could reduce your benefits. Information on how credits are determined by SSA can be obtained at the SSA website: www.ssa.gov

SSA will only give you credit for self-employment income reported on a tax return within three years, three months and 15 days after the taxable year you earned the income. If you report a change after the time limit has passed, SSA earning records can only be revised if certain conditions are met.

The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.

Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.