How does Self Employment Income Sole Proprietor – Schedule C
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IRS Tax Tips for Self Employed
If you are self-employed, you normally carry on a trade or business. Sole proprietors and independent contractors are two types of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips from the IRS:
- SE Income. Self-employment can include income you received for part-time work. This is in addition to income from your regular job.
- Schedule C or C-EZ. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet certain other conditions. See the form instructions to find out if you can use the form.
- SE Tax. You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, attach the schedule to your federal tax return.
- Estimated Tax. You may need to make estimated tax payments. Try IRS Direct Pay. People typically make these payments on income that is not subject to withholding. You usually pay estimated taxes in four annual installments. If you do not pay enough tax throughout the year, you may owe a penalty.
- Allowable Deductions. You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
- Our webpage on the Home Office Deduction
- When to Deduct. In most cases, you can deduct expenses in the same year you paid, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Additional IRS Resources:
- Form 1040-ES, Estimated Tax for Individuals
- Publication 505, Tax Withholding and Estimated Tax
- Publication 535, Business Expenses
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If you are self employed and get tax subsidies through Covered CA to pay your premium, the deduction claimed for the premiums under §106 * line 16 and the Premium Tax Credit (PTC) that gets computed, taking the deduction into account, must be less than or equal to the premiums
Now that’s a mouth full isn’t it!
Check out Publication 974 where there are special instructions for figuring the self-employed health insurance deduction and PTC if you or your spouse was self-employed, you or a member of your tax family was enrolled in a qualified health plan and you may be eligible for the PTC.
Because the amount of the self-employed health insurance deduction may affect the amount of the PTC, and the amount of the PTC may affect the amount of the deduction, a taxpayer who may be eligible for both may have difficulty determining the amounts of those items.
A taxpayer who may be eligible for both may follow the instructions in this part to determine amounts of the self-employed health insurance deduction and PTC that are allowable under the law. Publication 974
Resources & Links
- If you earn less than $60k, tax software is available for Free!
- VITA IRA Volunteer Income Tax Assistance
- IRS Publication #535 Business Expenses
- What about estimating and uneven income? Kaiser Foundation FAQ’s.
- IRS Pub. #974 Page 56. Use the Premium Tax Credits and not the Self-Employed Health Insurance Deduction Worksheet in Publication #535.
Main Small Biz Tax Credit and Related Pages
If you use one of the many online platforms available to rent a spare bedroom, provide car rides, or to connect and provide a number of other goods or services, you’re involved in what is sometimes called the sharing economy.
An emerging area of activity in the past few years, the sharing economy has changed how people commute, travel, rent vacation accommodations and perform many other activities. Also referred to as the on-demand, gig or access economy, the sharing economy allows individuals and groups to utilize technology advancements to arrange transactions to generate revenue from assets they possess – (such as cars and homes) – or services they provide – (such as household chores or technology services). Although this is a developing area of the economy, there are tax implications for the companies that provide the services and the individuals who perform the services.
This means if you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash. On the other hand, depending upon the circumstances, some or all of your business expenses may be deductible, subject to the normal tax limitations and rules.
Learn More ===> irs.gov/sharing-economy
The following tax issues may apply to those participating in the sharing economy:
- Issues for Individuals Performing Services
- Issues for the Companies Providing Services
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Are you a Business or a Hobby? A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. Consider nine factors below when determining whether an activity is a hobby. Make sure to base the determination on all the facts and circumstances. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
9 Factors distinguish between a business and a hobby?
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
Allowable Hobby Deductions.
Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
Limits on Hobby Expenses.
Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
How to Deduct Hobby Expenses.
Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.
Use IRS Free File.
Hobby rules can be complex and IRS Free File can make filing a tax return easier. IRS Free File is available until Oct. 16. Taxpayers earning $64,000 or less can use brand-name tax software. Those earning more can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.
Additional IRS Resources:
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Where on what forms do I Deduct Business Use of the home?
Deduct expenses for the business use of your home on Form 1040 or Form 1040-SR. Where you deduct these expenses on the form depends on whether you are a self-employed person or a partner.
If you use your home in your trade or business and file Schedule C (Form 1040 or 1040-SR), report the entire deduction for business use of your home on line 30 of Schedule C (Form 1040 or 1040-SR).
Home Office Deduction
If you use your home for business, you may be able to deduct expenses for the business use of your home. If you qualify, you can claim the deduction whether you rent or own your home. You may use either the simplified method or the regular method to claim your deduction.
- Regular and Exclusive Use.
- As a general rule, you must use a part of your home regularly and exclusively for business purposes. The part of your home used for business must also be:
Your principal place of business, or
A place where you meet clients or customers in the normal course of business, or
A separate structure not attached to your home. Examples could include a garage or a studio.
- Simplified Option. If you use the simplified option, multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. This option does not change the rules for claiming a home office deduction.
- Regular Method. This method includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.
- Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829.
- Deduction Limit. If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.
- If you are self-employed and choose the regular method, use
- Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct.
- You can claim your deduction using either method on Schedule C, Profit or Loss From Business.
- See the Schedule C instructions for how to report your deduction.
- You must meet additional rules to claim the deduction if you are an employee. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions.
For more on this topic, see Publication 587, Business Use of Your Home. Scroll down or it’s in the right hand column
There are special rules for certain business owners:
See our main page on the Self Employed Tax Credit Line 29 IRS §106.
Schedule C – Line 12 Biz Income or Loss, Line 29 Health Insurance Premiums, Line 37 Adjusted Gross Income, MAGI Income