According to IRS mandates, people who own their own businesses are subject to additional tax requirements. This is true even if you have a job in which you are an employee and not your own boss. The government might be looking for you to dish out some additional cash on that business enterprise in the form of self-employment taxes.
Self-employment tax is the money that a business pays on the profit that it makes. It would be nice to think that a perk of all the blood, sweat, and toil is a tax-free enterprise. But there's no need for dreaming during broad daylight. The government has guidelines for determining who's subject to these taxes and who can avoid them, and by what amount. (This does provide a ray of good news for businesses that haven't quite gotten off the ground. A business has to make more than $400 in net earnings to be required to pay taxes on the profit. This is how much money you have been paid by a client.)
The IRS has determined that any individual who is the sole owner of his or her own business is considered to be self-employed. This includes independent contractors and freelancers who work for clients but retain control to direct the way that the work they perform is carried out; in other words, the final decisions are left up to them on how to complete their tasks. People who have entered into partnership with someone else to sell goods or services are also considered to be self-employed.
As a business entity, you're required to pay taxes on the money that you receive for services rendered. It is not the responsibility of the client to do so. This is a misunderstanding of some freelancers and independent contractors. There are responsibilities on the part of the person hiring you, but paying your taxes is not one of them. If tax dollars are deducted by the client, then they are not a client - they are your employer and the tax rules do not apply.
Self-employed individuals fill out another form in addition to the standard 1040 tax form. This form is called a Schedule SE. All of the money that they receive is reported on a Schedule C or C-EZ form. All of these forms are available on the IRS website along with information about filling them out.
Self-employment taxes can be paid much like the taxes that an employer pays for their employees. If you anticipate that you will make money that is subject to a large tax bill, this can be paid in increments during the year instead of in a lump sum at tax time. People who will pay $1,000 or more in taxes can fill out a 1040-ES form for estimating tax payments and send in a payment once a quarter. Overestimation results in a refund at tax time.
Know the rules regarding taxes for self-employed individuals. If all of those extra forms become confusing (and they can for even the savviest person), be sure to hire the services of a competent tax preparer to sort it all out.