There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you generally are considered to be self-employed. Following are six key points you should know about self-employment and self-employment taxes, some of which might be basic, but nonetheless will serve as a handy reminder:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You can calculate self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax when you calculate your adjusted gross income.

3. If you are self-employed you might have to make 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. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

4. You can deduct the costs of running your business or which otherwise are related to the income earned from the business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold, but rather can deduct in the current year.

5. To be deductible, the IRS requires that 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. An expense does not have to be indispensable to be considered necessary.

6. To report income and deductible expenses from self-employment, including possible net business losses, you need to file an IRS Schedule C, Profit or Loss from Business, or IRS Schedule C-EZ, Net Profit from Business, with your Form 1040.

For more information about self-employment income and self-employment taxes, contact your professional tax preparer or tax advisor, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Additional information also is available from the IRS Self-employment Tax Center, and from IRS Publication 334, “Tax Guide for Small Business,” IRS Publication 535, “Business Expenses,” and IRS Publication 505, “Tax Withholding and Estimated Tax,” all available at the official IRS website at www.IRS.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676), or by just clicking on the links below. Please feel free to share this article with others that might benefit from this information and the attached links.

Links:

• Publication 334, Tax Guide for Small Business
• Publication 535, Business Expenses
• Publication 505, Tax Withholding and Estimated Tax
• Schedule C, Profit or Loss from Business and instructions
• Schedule C-EZ, Net Profit from Business
• Schedule SE, Self-Employment Tax and instructions
• Form 1040-ES, Estimated Tax for Individuals