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Self –employment tax basics

Self-employment is an enticing option when you think of it. You can avoid the hectic timing. The monotonous meetings and the most important is the skip from the office politics. But with the freedom comes the responsibility of taxes.

If you need to know if you qualify as self-employed just answer these questions.

  • Are you a sole proprietor or an independent contractor of the trade or business?
  • Are you a member of a partnership that carries on a trade or business?
  • Are you otherwise in business for yourself (includes part time business)?

irs self employment taxIf yes then you are required to file an annual return and pay estimated tax quarterly. Generally you will have to pay self-employment tax (SE) as well as the income tax. SE tax is a social security and Medicare tax for individuals who work for themselves. While you are working on determining if you are subject to SE, you have to start figuring out your net-profit and net loss on your business. There is a simple method to do that, by subtracting your business expenses from your business income. If the expenses are less than the income, the difference will be the next profit and it is filed on page one of your form 1040.

If the expenses are more than the income, it is net loss and you can deduct your loss from the gross income on page one of form 1040. In some cases loss is limited.

You are obligated to file an income tax return if your net earnings were $400 or more and if they were less than $400 you still have to file an income tax return if you meet any other filing requirement listed in the form 1040 instructions.