Whew! You made it through your first year as an entrepreneur. How do you feel? You should be proud of yourself for having made it through the first year, and ready to take on more in the New Year. However, last year isn’t quite done with yet. Yes, I know the calendar has changed, but you still need to file your taxes, and pay self-employment taxes. You may be asking yourself “How do I know if know if I owe for self-employment taxes, and how do I file for them?” Let’s take a look at what you need to do for self-employment taxes. Bear with me, as we’re getting into accounting territory here.
Do I Need to File Self-Employment Taxes?
The first question that needs to be answered is if you even need to file for self-employment taxes. If you made more than $400 during the year, you will need to file Schedule SE with the IRS. This means that the net profit that is shown on Schedule C or Schedule C-EZ needs to be more than $400. This would be all money you charged your customers, less all the business related expenses you had during the year. This would be the amount shown on line 31 on Schedule C or line 3 Schedule C-EZ.
If it turns out that you do need to file for self-employment taxes, you can start filling out schedule SE. However, the form is divided into two parts, one part is the short form, and the other is the long from. As you can guess, the short form is much simpler to fill out. To be able to use the short form, you must not:
- Have received wages or tips during the year,
- Be a minister, member of a religious order, or a Christian Science practitioner who has received approval not to be taxes on earnings from being a minister, but will owe self-employment tax on other earnings,
- Use an optional method to figure net earnings (as this is a bit more complicated, you probably will not want to do this), or
- Have received church employee income from form W-2 of $108.28 or more.
If one of the above applies to you, you have to use the long form.
How to Calculate Your Self-Employment Income
To calculate your self-employment income, you put your net profit or loss from either Schedule C or Schedule C-EZ on Schedule SE in either the short or long form section. You will multiply this amount by 93.25% to get the taxable amount, and then multiply that amount by 2.9%. You will then take that amount and add it to an amount that is 10.4% times the maximum self-employment earnings of $110,100 less the sum of the following:
- Your social security wages and tips and railroad retirement (tier 1) compensation,
- Any unreported tips subject to social security tax, and
- Your wages that are subject to social security tax.
The amount you calculated is then carried over to line 56 on your Form 1040 as part of the taxes you owe.
So, what do you do if you have more than one business? In this case, your net earnings from each business (or each Schedule C) are combined on to one Schedule SE.
If you and your spouse have self-employment income, you each would need to file a separate Schedule SE. The IRS requires that if one spouse qualifies and uses the short form, the other spouse must use the long form. However, since the short form and long form are on a single Schedule SE, only one Schedule SE needs to be filed.
Now for a bit of good news. You can claim an adjustment to income on line 27 of your 1040 for one-half of your self-employment income. What this does is reduces your adjusted gross income, which should in turn reduce your taxable income (every little bit helps).
A little intimidating? Maybe, but if you have survived your first year of business, nothing should intimidate you. However, if you run into problems or have additional questions, a good accountant (like the author of this post) would be more than happy to give you a hand.
In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.
The author, Chris Peden, CPA, CMA, CFM, has over 15 years of experience with helping people and companies with organizing and making sense of their finance information, as well as meeting their regulatory compliance requirements. He is also available as a freelance blogger if you need an article on finance, accounting or taxes for your blog. He can be reached at email@example.com.