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Keyword: Self-employed

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1.16 IRS Procedures: W–4 - Allowances, Excess FICA, Students, Withholding


For the first half of the year I was self-employed. I have now started employment with a new company and realized that they will be withholding for social security, too. Am I responsible for paying the social security part up to the limit twice?

No, social security tax is paid up to the annual wage base limit regardless of whether your income is derived from self employment income, wages and tips, or a combination of both. For 2003, this dollar amount is $87,000. When computing Form 1040, Schedule SE (PDF) , Self-Employment Tax , the annual wage base amount is addressed to prevent over payment of the social security tax.

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4.3 Interest/Dividends/Other Types of Income: 1099–MISC, Independent Contractors, and Self-employed


The instructions for Form 1099-MISC, Box 7, say if you are not self-employed, call the IRS for information about how to report any social security and Medicare taxes. I need to know how do I report social security and Medicare taxes if I received income reported on a Form 1099-MISC, but was not self-employed?

You need to use Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income. Cross out the word "Tip" and insert the word "Wages" at the top of the form and also at the top of Schedule U, which is attached to the bottom of the form. Follow the instructions on Form 4137 to compute your share of your social security and Medicare taxes. Attach Form 4137 to your Form 1040. You may call us at 1 800-829-1040 if further clarification of the procedures is necessary.

You may want to file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This form requests the IRS to make an official determination of whether or not you were an employee. To make this determination, the IRS will need information from you and your employer.

References:

  • Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income
  • Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

My son is a newspaper carrier. I would like to know if this income is subject to Social Security and Medicare tax and if I must file a Schedule C for him?

Your son may be liable to pay into the Social Security and Medicare system by paying self-employment tax. However, if your son is under the age of 18 he exempt from self-employment tax. Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution) are considered by statute as nonemployees and are treated as self-employed for all Federal tax purposes, including income and employment taxes.

Independent contractors report their income on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) , or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business . See Form 1040, Schedule SE (PDF), Self-Employment Tax , which must be filed if net earnings from self-employment are $400 or more. If your child is a newspaper carrier under the age of 18, he is exempted from self-employment tax.

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How do you determine if a person is an employee or an independent contractor?

The determination is complex, but is essentially made by examining the right to control how, when, and where the person performs services. It is not based on how the person is paid, how often the person is paid, nor whether the person works work part-time or full-time. There is no statutory definition of what an employee is, but from common law three basic areas have been identified:

  • behavioral control,
  • financial control, and
  • type of relationship.

    • For more information on employer-employee relationships, refer to Chapter 2 of Publication 15-A (PDF), Employer's Supplemental Tax Guide. If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

    Unless you have requested a determination by filing Form SS-8, you generally have to report your nonemployee compensation on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You also need to complete Form 1040, Schedule SE (PDF), Self-Employment Tax, and pay self-employment tax on your net earnings from self-employment, if you had net earnings from self-employment of $400 or more. This is the method by which self-employed persons pay into the social security and Medicare trust funds. Generally, there are no tax withholdings on this income. Thus, you may have been subject to the requirement to make quarterly estimated tax payments. If you did not make timely estimated tax payments, you may be assessed a penalty for an underpayment of estimated tax. Employees pay into the social security and Medicare trust funds, as well as income tax withholding, through payroll deductions.

    References:

    I received a Form 1099-MISC with an amount in box 7, (nonemployee compensation). What forms and schedules should be used to report income earned as an independent contractor?

    Independent contractors report their income on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business (Sole Proprietorship). You should also be aware of Form 1040, Schedule SE (PDF), Self-Employment Tax, which must be filed if net earnings from self-employment are $400 or more. This form is used to figure your social security and Medicare tax which is based on your net self-employment income. You may also need to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates & Trusts, if you do not make estimated tax payments.

    References:

    I made several thousand dollars moonlighting as an independent contractor. What taxes do I need to pay?

    You are responsible for Federal income tax and self-employment taxes on your income as an independent contractor. Self-employment taxes are your contributions to Social Security and Medicare. Your self-employment income and expenses will be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax, to compute and report your social security and Medicare tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

    References:

    4.10 Interest/Dividends/Other Types of Income: Ministers' Compensation & Housing Allowance


    Are all ministers treated as self-employed for social security purposes?

    Services that a minister performs in the exercise of his or her ministry are covered under the Self-Employment Contributions Act (SECA). That means they are exempt from Social Security and Medicare withholding, but they are responsible for paying self-employment tax on their net earnings from self-employment.

    There are some members of religious orders, ministers, and Christian Science practitioners who have requested and been granted exemption from self-employment tax. There are also members of religious orders who have taken a vow of poverty and ministers who are covered solely by the social security laws of another country under a social security agreement between the United States and that other country.

    References:

    • Publication 517, Social Security and Other Information for the Members of the Clergy and Religious Workers
    • Tax Topic 417, Earnings for clergy

    9.3 Estimated Tax: Individuals


    I was self-employed for the first half of the year and made estimated tax payments. Now, I am a wage earner and my employer withholds taxes. Must I continue to make estimated tax payments?

    In general, you may owe a penalty for 2003 if the total of your withholding and estimated tax payments did not equal at least the smaller of:

  • 90% of your 2003 tax, or
  • 100%* of your 2002 tax. (Your 2002 tax return must cover a 12-month period.)
    • If your timely and correct estimated tax payments plus the Federal withholding from your wages meet the estimated tax requirements shown above, you will not need to make any additional payments for estimated tax, nor will you need to inform the IRS of the change.

    *If the total amount of your withholding and estimated tax payments equalled 100% of your 2002 income tax liability, you will not be subject to the failure to pay estimated tax penalty. However, not making additional estimated tax payments may mean that you have a large income tax liability when you file your income tax return. (If you are a higher income taxpayer with a AGI of more than $150,000 ($75,000 if your filing status is married filing separate)), substitute 110% for 100% if last year is 2002. Note: the percentage change depending on the tax refer to Publication 505 , Tax Withholding and Estimated Tax.

    References:

    12.1 Small Business/Self-Employed/Other Business: Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation


    Can a husband and wife run a business as a sole proprietor or do they need to be a partnership?

    It is possible for either the husband or the wife to be the owner of the sole proprietor business. The other person could work in the business as an employee. If the spouses intend to carry on the business together and share in the profits and losses, then they have formed a partnership. See Rev. Proc. 2002-69 for Special Rules for Spouses in Community States.

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    Are partners considered employees of a partnership or are they self-employed?

    Partners are considered to be self-employed. If you are a member of a partnership that carries on a trade or business, your distributive share of its income or loss from that trade or business is net earnings from self-employment. Limited partners are subject to self-employment tax only on guaranteed payments, such as salary and professional fees for services rendered.

    References:

    12.2 Small Business/Self-Employed/Other Business: Form 1099–MISC & Independent Contractors


    What is the difference between a Form W-2 and a Form 1099-MISC?

    Both of these forms are called information returns. The Form W-2 is used by employers to report wages, tips and other compensation paid to an employee. The form also reports the employee's income tax and Social Security taxes withheld and any advanced earned income credit payments. The Form W-2 is provided by the employer to the employee and the Social Security Administration. A Form 1099-MISC is used to report payments made in the course of a trade or business to another person or business who is not an employee. The form is required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or services are paid. The form is provided by the payor to the IRS and the person or business that received the payment.

    References:

    How do you determine if a person is an employee or an independent contractor?

    The distinction between whether a worker is an employee or an independent contractor has important tax consequences. Worker classification affects how you pay your Federal income tax, social security and Medicare taxes, and how you file your tax return. The classification also affects your eligibility for employee benefits. Those who should be classified as employees, but aren't, may lose out on workers' compensation, unemployment benefits, and, in many cases, group insurance (including life and health), and retirement benefits.

    Certain workers are considered employees by statute for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or for federal income tax withholding from wages. Examples of workers considered employees by statute include corporate officers, certain agent, or commision-drivers, full-time life insurance sales persons, certain home workers, certain traveling of city sales persons.

    Where there is no controlling statute, a worker's status is determined by applying the common law test, which applies for purposes of FICA, FUTA, Federal income tax withholding, and the Railroad Retirement Tax Act. A worker's status under the common law test is determined by applying relevant facts that fall into three main categories: behavioral control, financial control, and the type of relationship itself. In each case, it is very important to consider all the facts - no single fact provides the answer.

    BEHAVIORAL CONTROL: These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done -- as long as the employer has the right to direct and control the work. For example:

  • Instructions -- if you receive extensive instructions on how work is to be done, this suggests that you may be an employee. Instructions can cover a wide range of topics, for example: how, when, or where to do the work, what tools or equipment to use, what assistants to hire to help with the work, and where to purchase supplies and services. If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.
  • Training -- if the business provides you with training about required procedures and methods, this suggests that the business wants the work done in a certain way, and you may be an employee.

    • FINANCIAL CONTROL: These facts show whether there is a right to direct or control the business part of the work. For example:

  • Significant Investment -- if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
  • Expenses -- if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
  • Opportunity for Profit or Loss -- if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

    • RELATIONSHIP OF THE PARTIES: These are facts that illustrate how the business and the worker perceive their relationship. For example:

  • Employee Benefits -- if you receive benefits, this is an indication that you are an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
  • Written Contracts -- a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

    • If you are not sure whether you are an independent contractor or an employee, complete Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Publication 1779 (PDF), Employee Independent Contractor Brochure, andPublication 15-A (PDF) , Employer's Supplemental Tax Guide, provide additional information on independent contractor or employee status.

    For information on the tax responsibilities of self-employed persons, refer to Publication 505, Tax Withholding and Estimated Tax, and Publication 533, Self-Employment Tax.

    References:

    • Publication 15-A (PDF), Employer's Supplemental Tax Guide
    • Publication 505, Tax Withholding and Estimated Tax
    • Publication 533, Self-Employment Tax
    • Publication 1779, Employee Independent Contractor Brochure
    • Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding
    • Tax Topic 762, Independent contractor vs. employee

    I work as an independent contractor, but I do not own a business and do not perform services in the name of a business. Can I file my tax return without filing Schedule C or Schedule SE?

    The income you earn as an independent contractor generally will be considered income from self-employment and you will need to file Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

    References:

    I made several thousand dollars moonlighting as an independent contractor. What taxes do I need to pay?

    You are responsible for Federal income tax and self-employment taxes on your income as an independent contractor. Self-employment taxes are your contributions to social security and Medicare. Your self-employment income and expenses will be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will use Form 1040, Schedule SE (PDF), Self-Employment Tax, to compute and report your social security and Medicare tax. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

    References:

    In addition to my regular job, I had a part-time business fixing cars. Do I have to report the money I made fixing cars?

    Yes. This is self-employment income. You must report it on Form 1040 Schedule C (PDF), Profit or Loss from Business or Form 1040, Form 1040, Schedule C-EZ (PDF) Net Profit from Business. You may also have to file Form 1040 Schedule SE (PDF) and pay Self-Employment Tax. For more information, refer to Tax Topic 554, or Publication 533, Self-Employment Tax. Since there is no withholding on your Self-Employment Income, you may need to make quarterly Estimated Tax Payments. This is done using a Form 1040ES (PDF) Estimated Tax for Individuals.

    References:

    I did some carpentry work in exchange for dental services. Do I report this on my federal tax return?

    When you exchange goods for services, it is called bartering. The goods or services exchanged have a fair market value that results in gross income that should be included in income by both parties. If you are a member of a barter club and you receive credits for goods or services rendered to other members, the value of these credits are included in income. For information reporting, barter income is reported on Form 1099B (PDF), Proceeds From Barter Exchange Transactions.

    For more detailed information on bartering refer to Tax Topic 420 , Bartering Income, and Publication 525, Taxable and Nontaxable Income.

    References:

    I made some money repairing radios and television sets last year. How do I report this income?

    A person with income from Self-Employment files Form 1040, Schedule C (PDF), Profit or Loss from Business, or in some cases, files Form 1040, Schedule C-EZ (PDF), Net Profit from Business to report the profit or loss from the business, and files Form 1040, Schedule SE (PDF), Self-Employment Tax to figure Social Security and Medicare Tax. Refer to Tax Topic 407, Business Income, Publication 533, Self-Employment Tax, and Publication 334, Tax Guide for Small Business, for additional information. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

    References:

    What forms and schedules should be used to report income earned as an independent contractor?

    Independent contractor report their income on Form 1040, Schedule C (PDF), Profit or Loss from Business, or they may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. Independent contractors should also be aware of Form 1040, Schedule SE (PDF), Self-Employment Tax. This form is used to figure social security and Medicare tax which is based on self-employment income. Also, see Form 1040ES (PDF) Estimated Tax For Individuals, as you may need to make quarterly estimated tax payments.

    References:

    What, if any, quarterly forms must I file to report income as an independent contractor?

    There are no quarterly income reporting requirements for Federal income tax purposes. However, because you will have no Federal Income Tax withheld from your income, you may need to make quarterly estimated tax payments. You use Form 1040ES (PDF), Estimated Tax for Individuals, for this purpose.

    You may be subject to a penalty for underpaying your estimated tax installments. For more information refer to Publication 505, Tax Withholding and Estimated Tax. You need to be aware that there may also be state and local quarterly reporting requirements. You can start looking for information at How to Contact Us. You may want to go to your state's individual web site for additional information. To access the state you need to direct your question to, please go to our Alphabetical State Index.

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    12.5 Small Business/Self-Employed/Other Business: Form SS–4 & Employer Identification Number (EIN)


    As a sole proprietor, do I need an employer identification number (EIN)?

    As a sole proprietor, you would need to obtain an identification number if either of the following apply: (1) you pay wages to one or more employees, or (2) you file pension or excise tax returns. If these conditions do not apply, your social security number is your taxpayer identification number.

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    Is an employer identification number (EIN) required if the husband and wife are the only persons working in the business?

    If both of you carry on a business together and share in the profits and losses, you are a partnership and each would receive a Form 1065, Schedule K-1 (PDF) that is important for determining your self-employment income. If you work for your spouse, you should receive a Form W-2, showing taxes withheld and the owner spouse would claim the wages paid to you as a deduction. Both a partnership and a sole proprietor with an employee must have an EIN.

    References:

    Does a small company need a tax ID number?

    A sole proprietor who does not have any employees and who does not file any excise or pension plan tax returns is the only business person who does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.

    References:

    How do I apply for an employer identification number (EIN)?

    By Telephone or Mail To obtain an EIN, you must complete Form SS-4 (PDF), Application for Employer Identification Number. After you have completed the Form SS-4, you can get the EIN by mail, or by phone. The instructions for Form SS-4 provide both an IRS service center address and a phone number to apply under the Tele-TIN program.

    Online You may also apply online. Once an EIN has been successfully completed and submitted, an EIN will be issued. Use the attached linked for processing instruction Apply Online.

    Through Your State OfficeSome states participate in a program called the Fedstate Federal Employer Identification Number (EIN) project. This allows you to apply directly from your state. Visit the attached link to determine if your state take part in this program Fedstate Program.

    For more information, refer to Tax Topic 755, Employer Identification Number (EIN) - How to Apply, or Publication 1635 (PDF), Understanding Your EIN.

    References:

    I would like to submit Form SS-4, Application for Employer Identification Number, by fax. What is the fax number?

    You can find the fax telephone numbers by calling the IRS at 1-800-829-1040 or refer to Tax Information for Business. This can be found on the IRS website www.irs.gov under Businesses.

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    Under what circumstances am I required to change my employer identification number (EIN)?

    If you already have an EIN, and the organization or ownership of your business changes, you may need to apply for a new number. Some of the circumstances under which a new number is required are as follows:

  • An existing business is purchased or inherited by an individual who will operate it as a sole proprietorship
  • A sole proprietorship changes to a corporation or a partnership,
  • A partnership changes to a corporation or a sole proprietorship,
  • A corporation changes to a partnership or a sole proprietorship, or
  • An individual owner dies, and the estate takes over the business.

    • This list is not all inclusive. Please refer to the website www.irs.gov under Business, then Employer ID Numbers.

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    If I have an employer identification number (EIN) and do not need it, how can I revoke the EIN?

    If you do not need to retain your EIN and wish the EIN to be revoked, you can write to the Entity Control Unit at the IRS Service Center where you would normally file your returns and make that request. Make sure that either the President or other Principal Officer signs the statement, if it is a corporation, or a managing member, if it is a limited liability company, or a general partner, if it is a partnership.

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    12.8 Small Business/Self-Employed/Other Business: Schedule C & Schedule SE


    I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?

    Your self-employment income is reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or on Form 1040, Schedule C-EZ (PDF), Net Profit from Business.

    Your Medicare and social security taxes are reported on Form 1040, Schedule SE (PDF), Self-Employment Tax.

    As a self-employed person, you pay your Medicare and social security taxes the same way you pay your income taxes. If you expect to owe less than $1,000 in total taxes, you can pay them when you file your income tax return. If you expect to owe $1,000 or more in total taxes, you will need to make estimated tax payments. These payments are made quarterly using Form 1040ES (PDF), Estimated Tax for Individuals. You will need to figure these taxes at the beginning of the year. To learn about figuring and making estimated tax payments, please refer to Publication 505, Tax Withholding and Estimated Tax.

    References:

    I am a sole proprietor. Can I use Schedule C-EZ instead of Schedule C?

    You can use Form 1040, Schedule C-EZ (PDF) to determine your net profit if you have only one sole proprietorship and you meet all of the following requirements: your business expenses were not more than $2,500, and you did not have a net loss from your business, you use the cash method of accounting, and you did not have an inventory during the year. There are other requirements. Refer to page 1 of Schedule C-EZ to see if you qualify. Additional information is also available in Tax Topic 408, Sole Proprietorship.

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    12.9 Small Business/Self-Employed/Other Business: Starting or Ending a Business


    If you start your own business and send in your quarterly estimated income taxes, must you also file a personal income tax return at the end of the year?

    If you have $400 or more of net profit from your business, you will have to file a Form 1040 with a Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit form Business and Form 1040, Schedule SE (PDF), Self-employment Tax .

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    I just started a small business and want to know if I have to file my income taxes quarterly or at the end of the year?

    The Federal Income Tax return is filed annually. As a self-employed individual, if after deducting withholding and credits you expect to owe $1,000.00 at the end of the year, you should make estimated tax payments on a quarterly basis. Form 1040ES (PDF) , Estimated Tax for Individuals , will assist you in determining if estimated tax payment are due and how they are paid.

    When you file the income tax return at the end of the year, you include the income from the business on the return. The forms to be filed are Form 1040 (PDF), U.S. Individual Income Tax Return , Form 1040, Schedule C (PDF), Profit or Loss from Business Form 1040, Schedule SE (PDF), Self-Employment Tax . If estimated tax payments where made during the year, they will be claimed on the individual income tax return as payments. See the Form 1040, Line 62.

    References:

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