If you own a small business or operate as an independent contractor, rest assured that the government wants a piece of your pie. Specifically, they want to tax the profit that you have seen from your business. But don't worry just yet. The full amount of taxable income is determined by more than just the total profit your business made.

A 'self-employed' designation is determined by the IRS. For tax purposes, anyone who is the sole owner of their trade or business, an independent contractor (this includes freelancers), or a member of a partnership in a small business are classified as self-employed. As such, there are additional tax forms that must be filed each year the business is in operation.

A self-employed individual who earns $400 or more in profit during the year must declare that income to the IRS. This also applies to church employees who earn more than $108 but didn't receive a W-2 reporting form. The IRS forms will determine what taxes, if any, need to be paid.

All self-employed persons must file a Schedule SE (Self-Employment Tax) form in addition to the usual IRS Form 1040. The Schedule SE form has a long and a short version, along with instructions concerning who needs to fill it out. The SE records the total earnings of the business or trade enterprise, the amount of tax due (according to IRS calculations), and the tax amount after a fifty-percent deduction is applied. But this amount may not be the final tax owed on the profit of the business. There is another form that lists the profit or loss from the business operation, known as Schedule C (Profit or Loss From Business). Any portion of the profit that was funneled back into the business to pay for expenses is annotated here.

The total profit realized by the business is also reported here, just as it was recorded on the Schedule SE. Freelancers and independent contractors may have a business account where they record each payment transaction to determine this amount. Anyone who has an ongoing contract with you for services worth more than $600 for the year is required to send you a 1099-MISC form. This form details the amount of money paid to you for work done during the tax year.

Home-based operations can use the Schedule C to record any expenses for the business use of the home. (This amount is transferred from Form 8829, where the amount of the home deduction is calculated.) Information about the use of your vehicle for business purposes is also recorded on Schedule C. Businesses that deal in inventory for their products have room in Part III to list that information and the dollar amounts.

The Schedule C form is useful for determining the amount of taxes that your business must pay. An experienced tax professional will be able to tell you all of the deductions and exemptions that you are qualified to take against your profits to lower the amount of taxable income.

 

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