6 Tax Facts for Self-Employed Taxpayers
Posted by William Byrnes on April 23, 2014
In Tax Tip 2014-34, the IRS provided 6 tax tips for self employed taxpayers.
- Self-employment income includes income received for part-time work. This is in addition to income from a regular job.
- A self employed taxpayer must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040.
- A self employed taxpayer may have to pay self-employment tax as well as income tax if a profit was earned. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to calculate whether any self employment tax is due.
- A self employed taxpayer may need to make estimated tax payments. Taxpayers typically make these payments on income that is not subject to withholding. A taxpayer may be charged a penalty if not paying enough estimated taxes throughout the entire year.
- A self employed taxpayer can deduct some expenses paid to run your trade or business. A self employed taxpayer can deduct most business expenses in full, but some must be ’capitalized.’ Capitalization means that the deduction will be limited to just a portion of the expense each year over a period of years. By example, only the first $5,000 of the “start-up” expenses for a new business of the taxpayer is potentially deductible, and not until the year in which the active trade or business begins. All other start up expenses must be amortized over a 180-month period, beginning with the month the business starts. Thus, start up expenses in general are only deductible over this 180 month period, and not in the year actually incurred.
- A self employed taxpayer can deduct business expenses only if the expenses are both ordinary and necessary. An ordinary expense is one that is common and accepted in an industry. A necessary expense is one that is helpful and proper for the trade or business.
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