For some of us, calculating self-employment income is as easy as totaling up the amounts on our 1099-Misc forms and putting the number in the right box on our Schedule C. However, it's not that simple for everyone who has self-employment income. And while you'll likely want to consult a tax specialist or the IRS about specific questions, this article goes over some of the basic points of self-employment income, so you can be more informed on your day-to-day business decisions.
Likewise, here is a similar piece on 19 Self-Employment Deductions You Don't Want to Miss.
What Does the IRS Consider Self-Employment Income?
To be considered a trade or business, an activity does not necessarily have be profitable, and you do not have to work at it full time, but profit must be your motive. So for some who don't have profit as a motive, an activity could be considered a hobby and not a business. However, the IRS defines a hobby narrowly so be sure you understand the rules regarding profits and losses from a hobby.
What's the Difference Between Self-Employment and Employment?The IRS considers many factors when differentiating between activities it considers employment and contracting. Employees, even if they work at home, are not only directed by their employers in what work should be done but also how and when to do it. Employees usually receive regular paychecks, and payroll taxes are taken out. Additionally, the employer pays half of their Medicare and Social Security taxes. Employees must receive minimum wage. Employees receive a W-2 at tax time.
Independent contractors are not as closely supervised as employees, though they may possibly work in an office. They often (but not always) receive work on a project basis and may or may not be paid hourly. However, they are not subject to minimum wage laws. Independent contracts pay all of their own Social Security and Medicare taxes when they file their income taxes, through the self-employment tax, and they receive 1099-MISC, not a W-2.
How Do I Calculate Self-Employment Income?
If you receive 1099s, this is simple--just tally of the totals in Box 7 "Nonemployee Compensation." However, keep in mind that you will only receive a 1099 if you earned more than $600 from a company. If you earned less you still must report that income, so keep accurate financial records.
If you have a business that makes and/or sells goods you will need to calculated your gross income. This is done by subtracting the cost of goods sold from business revenue, though you will have to take into account returns and allowances. Again, you will need to keep accurate records and receipts to be sure you are accounting for all of your costs and sales. All of this is done on Schedule C. Read more about calculating gross income.
What Forms Do I Use?
Most of us will use the Schedule C or Schedule C-EZ. However, if you are a farmer, use Schedule F. But if your self-employment income is derived from a partnership use Schedule K-1. And then after you've calculated your income you will need Schedule SE to calculate self-employment tax. See all the self-employment tax forms you may need
What Is Not Consider Self-Employment Income?
Just to further clarify self-employment income, here are some things that the IRS does not typically consider self-employed income:
- Income for which your received a W-2 (which would mean you are and employee)
- Income from an activity that fits the narrow IRS definition of a hobby
- Interest and dividends (unless you are a dealer of bonds or securities)
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.