Tax Season Reminders for Entrepreneurial, Self-Employed Business Owners by Dustin Grizzle, CPA
Posted on March 10, 2017 by Dustin Grizzle
Taxpayers who own businesses or work as independent contractors have different tax filing and reporting requirement than other employers and employees. Following are answers to common questions for self-employed taxpayers.
Do I qualify as a Self-Employed Independent Contractor or am I an Employee?
The IRS considers a taxpayer to be self-employed when he or she:
- carries on a trade or business as a sole proprietor or independent contractor, or
- is a partner in a trade or business, or
- is otherwise in business for him or herself either full-time or part-time.
Complicating this definition is the assessment taxpayers must make to determine whether they are in fact independent contractors who “control or direct the financial aspects of their operations and only the result of the work they do, and not what will be done and how it will be done”. Under this definition, many freelance “gig” workers in today’s sharing economy would qualify as independent contractors. When this is the case, self-employed taxpayers are responsible for paying their income tax, Social Security tax and Medicare tax obligations as well as self-employment tax, which includes the business’s share of Social Security and Medicare tax that would have otherwise been paid by an employer.
Conversely, “employees” would have these taxes withheld and deducted automatically from the paychecks they receive from their employers. Moreover, self-employed taxpayers are responsible for paying self-employment tax, which includes the business’s share of Social Security and Medicare tax that would have otherwise been paid by an employer.
What are my Filing Requirements as a Self-Employed Business Owner?
Self-employed business owners who made or received payments during the tax year in the form of money, goods, property, or services, have obligations to file annual tax returns and report the income or loss from their businesses on Schedule C or Schedule C-EZ, depending on the total amount of their expenses. The income tax form a business owner must file will depend on the business’s structure. For example, a Corporation will typically file Form 1120, whereas a partnership will file Form 1065. In addition, business owners may be required to report their individual share of the business’s profit and loss on their Form 1040 personal income tax returns.
How do I Pay my Share of Tax Liabilities?
Self-employed independent contractors, who may include Uber drivers or individuals who rent out their properties on services such as Airbnb, may make quarterly estimated payments to prepay their tax liabilities for the year. This includes income tax, self-employment tax, alternative minimum tax (AMT) and other taxes that are not subject to withholding, such as interest, dividends capital gains and more. If a taxpayer fails to prepay enough of his or her required tax liabilities each quarter, he or she may be charged a penalty, even if they qualify for a tax refund.
Are there Opportunities for me to Reduce Self-Employment Income that is Subject to Tax?
Taxpayers who operate a business may deduct certain expenses from their taxable income. More specifically, deductions may be taken for “ordinary” expenses that are common in the taxpayer’s line of business or “necessary” expenses that are helpful and appropriate for the taxpayer’s trade. Examples include employee salaries, contributions to retirement plans, loan interest and certain insurance products.
For many entrepreneurs, their businesses are closely tied and often overlap into their personal lives. It is important, however, that business owners separate their business expenses from those that are incurred for personal use. For example, taxpayers who work from their homes may be able to deduct a percentage of their household expenses, and those who use their cars for business purposes may deduct a portion of the expenses they incur for maintaining the vehicle. In both of these situations, taxpayers will need to calculate how much of their home or automobile is used for business use compared to personal use.
About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and high-net-worth individuals. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.