Do you owe Self-Employment Tax?

Individuals that are self-employed have more income tax forms to be concerned with than just the basic 1040. For many, all those forms and instructions can begin to look the same and become quite daunting. But, it's really not as difficult as it may seem at first glance. So, before you start pulling your hair, find out if you're subject to pay any self-employment (SE) taxes.

The self-employment tax applies to individuals that have been deemed "self-employed" according to the IRS. Self-employment is determined by the ownership of the business or trade that you engage in. The basic rule of thumb is this: when the final decision about how to direct the method of providing goods and/or services rests with you, then you're self-employed. As such, freelancers and independent contractors are considered to be self-employed. The business enterprise can be based at home or run from an office at another site. It can be conducted completely over the Internet or from your garage. In other words, the location doesn't matter. The government simply looks at the amount of profit that the operation takes in.

As a self-employed individual, if your business earns $400 or more during the year, that excess is subject to self-employment tax. Additionally, church employees that earn more than $108.28 and don't receive a Form W-2 (which shows the amount and kinds of taxes that an employer withholds from your paycheck) are also subject to the tax.

There are a number of deductions and exemptions that the IRS makes available to apply to your business earnings. Just as with private individual earnings, anything that you can factor in to lower the operation's overall taxable income will lessen the tax bill at the end of the year. If you have an idea that you'll ultimately owe more than $1,000 in taxes, you can opt to pay quarterly throughout the year on an estimated basis.

In addition to the standard 1040 form, self-employed individuals must also fill out a Schedule SE form. The form details qualifications for the use of either the short- or the long SE form. A flowchart on the first page of the form directs the filer to one or the other. Most small-business owners and church workers without a W-2 will qualify to use the short version of the form. Businesses that made over $97,500 during the year are required to file the long SE form. Individuals with unreported tips and uncollected Social Security or Medicare taxes for wages earned are required to file the long form, as well. Each line of the form has an explanation of the amount that should be put there. Only earnings amounts before deductions should be entered. Any tax deductions that your business may qualify for should be recorded on a separate form (Schedule C) that works in tandem with the Schedule SE.

If you have employees, there are additional requirements that you must adhere to. Employment taxes must be paid for each employee; these are the federal, state, Social Security and Medicare amounts that you've undoubtedly seen on employee pay statements. Please visit the IRS website for further information about self-employment taxes for individuals and businesses with employees.