Reporting Self Employment Income To The IRS

If you had self-employment or freelance income this year, the IRS requires that you file additional income tax forms. Read about them here.

If you quit your corporate job this year and decided to freelance or start your own business, congratulations! You have joined the ranks of the self-employed. If you are fortunate, you also made some money this year. This means, of course, that the IRS would like a part of that self-employment income.

Many newly self-employed people have never had to declare self-employment income, so are not sure how to report to the IRS. If you are a sole proprietor, then there is at least one form - either Schedule C (Profit or Loss from Business) or Schedule C-EZ - that you must file with your individual income tax form 1040. Most sole proprietors will be able to file Schedule C, but some are allowed to file Schedule C-EZ instead.

The IRS allows you to use Schedule C-EZ instead of Schedule C if you meet several criteria. There are nine qualifications for filing Schedule C-EZ. You must:

· have only one sole proprietor business.

· make a profit or break even in your business.

· have had no employees at any time during the year.

· not declare business use of your home.

· not carry inventory in your business.

· have no more than $2,500 in business expenses.

· not be required to file form 4562 (Depreciation and Amortization).

· use the cash method of accounting.

· not carry forward a prior year's disallowed passive activity loss (applies to this business only).

If you meet all qualifications, then you can use the shorter EZ form.

If you have a net profit, then Schedule SE (Self-Employment Tax) must be filed as well. Additionally, if you used part of your home exclusively for business and meet other stringent requirements you may be able to file form 8829 (Expenses for Business Use of Your Home). Finally, if you purchased equipment (office furniture, machinery, a computer, etc.) for use in your business you may be able to depreciate it or use a Section 179 expense deduction. Form 4562 (Depreciation and Amortization) is competed and filed for this. For more details on the requirements for completing tax Forms 8829 and 4562 consult your tax advisor or the IRS.

To minimize the time it takes to complete your tax forms, it is a good idea to keep track of your income from self-employment as well as expenses you incur while earning that income. Using accounting or small business software will help you efficiently keep records. Some record-keeping tips include:



· Record your income as you receive it.

· Keep your personal expenditures separate from business expenditures.

· Weekly, or on a regular basis, record and categorize your expenses.

· If you use your vehicle for business and deduct the standard per-mile rate, you must keep a mileage log. The IRS will want to know the mileage on your car at the beginning of the year (or the date it was "placed in service" for business purposes) as well as the number of business miles your drove during the year. The number of business miles is not an estimate. To claim business miles, you must document your mileage for each use of your car.

· If you are claiming partial business use for any assets (such as a computer), you must also have the use percentage documented.

· If you travel, keep track of expenses including meals and entertainment. Generally, meals are only 50% deductible.

· Keep track of all fees, interest, and service charges related to the business. These count as expenses.

· Other expenses to keep track of include advertising, office expenses (paper clips, stapler, tape, etc.), repairs, utilities, and rent.

In preparation for next year's taxes, you should also complete Form 1040-ES to estimate next year's taxes. Based on this estimate, you file vouchers, along with tax payments, throughout the year. If your income changes versus your projection, you can adjust the payments later in the year. You also have the option of paying the whole year's tax in one payment early in the year. Generally, however, it is more beneficial for you to pay quarterly. Quarterly payments are generally due about two weeks after the end of each quarter: Quarter 1 due by April 15, quarter 2 by June 15, quarter 3 by September 15, and quarter 4 by January 15. If the 15th falls on a non-business day, then the IRS generally extends the deadline to the next business day.

The general rules for reporting self-employment income and paying self-employment taxes are relatively straightforward. There are, however, special circumstances that result in one or more exceptions to the general rules. Also, it is often difficult to know which expenses can be declared as business expenses and which the IRS disallows. For these reasons, it is recommended that you consult a tax advisor and/or the IRS regarding your unique tax situation.

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