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If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would file IRS Schedule C, Profit or Loss from Business, with your Form 1040.
Here are some things the IRS wants you to know about self-employment:
If you are self-employed, you generally have to pay self-employment (SE) tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. You figure SE tax yourself using a Form 1040, Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
If you are self-employed, you generally have to make quarterly estimated-tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year. Also, do not forget your state-tax obligations.
You can deduct the costs of running your business. These costs are known as business expenses and are deducted in the current tax year. For example: Did you take a client out to lunch? Fifty percent of the cost is deductible. Note: For 2021 and 2022 tax years meals are 100 percent deductible. The purchase of property or equipment for your business is fully deductible. Keep a mileage log for all business-related travel. Educational expenses, web courses, dues to professional organizations to enhance your business are all deductible.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. In addition, you must be able to substantiate your expenses. It would be wise to establish both a segregated credit card and checking account to pay for all business expenses. Personal and business expenses should not be comingled.
A home-office expense, if you qualify, has been simplified. The computation consists of multiplying $5 a square foot by a maximum of 300 square feet of office space, for a tax deduction of $1,500. You can still use the traditional method which involves a more-detailed procedure.
Self-employed taxpayers may deduct the full cost of health insurance for themselves and their families. This deduction cannot exceed the earned income you collect from your business.
The best self-employed tax strategy is to set up a self-employed-qualified-retirement plan [i.e., SEP-IRA or solo 401(k)] both for tax purposes and to save for your retirement years. You may contribute the lesser of 25 percent of income or $66,000 for the 2023 tax year for a SEP-IRA program.
The key to all these write-offs is keeping receipts and documenting all expenses, so you’re prepared in case the IRS comes knocking on your door for an audit.
For more information see IRS Publication 334, Tax Guide for Small Business and IRS Publication 535, Business Expenses.
Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or email@example.com.
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