Self Employment and Taxation

Self employment is simple by definition. If you conduct regular activities on your own with the goal to earn money from them, you are self employed.  Even if you have a job elsewhere where an employer relationship exists, the work you do on the side is self employment.  Also, any money earned over $400 is subject to special taxation.

Remember, you can also have special exemptions, credits, and deductions because you are self employed.  You will also be required to pay your taxes much differently than if you were employed full time and had no self employment.  The most important difference is you will be expected to pay your taxes quarterly if you earn over $1000.  If you fail to do so then you will incur penalties and interest owed.

Another very important factor is the fact that you will be subject to a "self-employment tax".  This special tax is designed to collect your part in the medicare/social security mandates.  This tax rate is 15.3% on the first $106,800 of net income from self employment and an additional 2.9% for the remaining balance.  You can deduct half the amount of your self-employment tax as an adjustment to income on page 1, Form 1040. Use Schedule SE (Form 1040) to compute your self-employment tax.

Income Deferral
If you are self employed and operate on a cash basis and usually get paid for your services after they are complete, you may look into deferring part of your income to the following year. This helps you get caught up from earned income claimed to actual funds taken in.  The key to this deferral is that you don't expect payment until the following year for work you had done the filing year. But if you do receive payment and the job is closed you must claim and pay taxes on it that very same year.

Estimated Tax
Anyone who is self employed knows this term well. This is when you pay your taxes quarterly by using estimates form years past to create the amount owed.  This is an important number because even though you may have done your best to estimate the proper amount, if you underestimate you may be penalized.  This can happen even if you are due a refund for the year.  For estimated tax purposes, the year is divided into 4 payment periods. The payments are due April 15, June 15, Sept. 15 and Jan. 15. If you don't pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you're due a refund when you file your income tax return.