Just like other business owners, self-employed individuals also have to report income and pay taxes to the IRS. So, how do you report self-employment income? What steps do you need to take? And, is there a special form you need to fill out? Get answers to these self-employment income questions and more below.
What is self-employment income?
Before we dive into how to report self-employment income, let’s briefly recap what self-employment income is, shall we?
So, what is considered self-employment income? Self-employment income is what self-employed individuals carrying on a trade or business can earn. This generally includes sole proprietors and independent contractors. It can also include members of a partnership. Incorporated businesses or a business taxed as a corporation cannot be self-employed.
Self-employed individuals own their business and work for themselves. Therefore, they’re taxed differently than other business owners. However, workers are still responsible for self-employed income tax and reporting business income to the government.
Self-employment income does not include:
- W-2 income
- Income received from a hobby
- Interest and dividends (unless it involves dealing and brokering investment securities)
Reporting self-employment income: 3 Steps
Self-employed individuals need to report income on a specific form based on their structure and situation. Plus, they need to calculate self-employment tax and report it on Schedule SE (Form 1040), Self-Employment Tax.
So, where do you begin when it comes to reporting self-employment income? Start with these three steps.
1. Gather information
Reporting self-employment income requires filling out a form. But before you can get to that step, you first need to gather some information. Information may vary depending on the form you need to fill out, but generally you need the following:
- Gross receipts or sales for the year
- Business expenses
- Amounts reported on 1099 forms issued by people you provided services to
- Financial statements (e.g., profit and loss statement)
- Cost of goods sold details (e.g., beginning and ending inventory)
The more information you gather and prepare, the better off you’ll be when you fill out your form (which just so happens to be our next step).
2. Fill out the appropriate form
The form you use for filing self-employment income can vary depending on your business. Generally, self-employed individuals must use Schedule C, Profit or Loss from Business, to report self-employment income to show a profit or loss. Typically, sole proprietors and single-member LLCs use Schedule C to report income.
Although Schedule C is the most common self-employment income report form, it’s not the only one. Here are a few other ones and who must use them:
- Schedule F: Farmers
- Schedule K-1: Partnerships and multi-member LLCs
Again, the majority of self-employed individuals must use Schedule C to report self-employment income. If you’re unsure about which form to use, consult the IRS and check out the Self-Employed Individuals Tax Center.
Completing Schedule C
Because it’s the most common self-employment income form, let’s go over how to fill out Schedule C. Schedule C helps you calculate gross income so you can report your self-employment income to the IRS. Basically, you can use the form to report how much money you made or lost in your business during the tax year.
If you’re required to file Schedule C, you need to fill out:
- Your name
- Social Security number
- Business or profession
- Business name, if applicable
- Business address
- Accounting method (e.g., cash-basis)
- Employer identification number (EIN)
You must also answer a few “Yes or No” questions about your business.
Once you fill out the intro section, you can move onto the following sections:
- Income (Part I)
- Gross receipts or sales
- Returns and allowances
- Other income
- Expenses (Part II)
- Car and truck
- Commissions and fees
- Contract labor
- Depreciation and section 179 expense deduction
- Employee benefit programs
- Legal and professional services
- Office expense
- Pension and profit-sharing plans
- Rent or lease
- Repairs and maintenance
- Taxes and licenses
- Travel and meals
- Other expenses
- Expenses for business use of your home
- Cost of Goods Sold (Part III)
- Method(s) used to value closing inventory
- Changes in determining quantities, costs, or valuations between opening and closing inventory
- Inventory at beginning of year
- Purchases less cost of items withdrawn for personal use
- Cost of labor
- Materials and supplies
- Other costs
- Inventory at end of year
- Information on Your Vehicle (Part IV)
- Complete this part only if you are claiming car or truck expenses and are not required to file Form 4562 for this business
- Other Expenses (Part V)
- List other expenses not included in the above sections
For more information on filling out Schedule C, check out the IRS’s Instructions.
3. Keep copies for your records
After you file the appropriate form with the IRS, keep a copy in your records for safekeeping and reference.
According to the IRS, you should hold onto records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.
Store your forms in a secure location, like a locked filing cabinet or password-protected program if you store them digitally.
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This is not intended as legal advice; for more information, please click here.