IRS Tax Liabilites for the Self-Employed

The tax liabilities of the self-employed are not as complicated as perceived by many. If you are self-employed, there are three federal "taxes" that you are accountable to pay and report including Personal Income Tax on your net taxable income, Social Security Tax and Medicare.

Income Tax

Regardless of your business, if you are self-employed (without employees) you will file a IRS form 1040 Schedule C (Profit or Loss from Business) with your regular personal income tax (1040). The schedule C is your profit and loss statement. Regardless of whether you pay yourself during the year, often called "taking draws" from your profits, as sole-proprietor you will document your total gross income, expenses and deductions to determine your taxable income from your business. This income becomes additional income on your personal income tax return.

Schedule-SE

The Schedule SE is your self-employment tax. This is the form used to calculate your Social Security tax as well as your Medicare tax. You are required to complete this form if your earnings are greater than $400. This is the form that the Social Security Administration uses to track your Social Security Benefits during your lifetime. If your net earnings are greater than $4,000 you will earn the maximum of four credits for the year. These credits are used to determine your Social Security Benefit, so it is important to report the income.
The Social Security tax rate for 2007 was 15.3% on your self-employment net income for your first $97,500. On everything above $97,500 that you earn, only the Medicare portion is taxable (2.9% in 2007).

Deductions

One-half of your Social Security tax is a deduction on your net income. The reason for this deduction is because if you were employed by a business, that business pays one-half of the tax for you (which is deductible for them), and the other half is paid for by you, the individual tax-payer.

Consider your other deductions as well. Computers, office supplies, vehicles and any other equipment that you use in your business is tax deductible including a portion/percentage of your home.

Estimated Tax Payments

If you expect to owe less than $1,000 in taxes, there is no requirement to pay estimated tax payments. You can file your taxes once a year with your personal income tax. If you expect to owe more than $1,000 you should make estimated tax payments throughout the year on a quarterly basis. Use Form 1040-ES to make these payments. They are due on the 15th of the month in April, June, September, and January. It is similar to the monthly tax withholdings your employer holds out for the IRS monthly. It is reported on your personal income tax the same way your withholdings would be while working for an employer, as payments.

As a self-employed individual, you alone are responsible for paying your taxes. There is no one withholding money from your check each month to assist paying your taxes at the end of the year. Remember that even if you make less than $400, you are still required to submit a 1040, 1040C and 1040SE to calculate your Social Security Tax.

Being self-employed gives you many freedoms that can allow you to enjoy your career. However, it is your responsibility to stay informed regarding IRS requirements, or hire an accountant to stay informed for you.

Resources

IRS Publication 334, Tax Guide for Small Businesses
Tax Topic 554, Self-Employment Tax
IRS Publication 505, Tax Withholding and Estimated Tax
IRS Form 1040, Schedule C Profit or Loss from Business (Sole Proprietorship)
IRS Form 1040, Schedule SE, Self-Employment Tax