This post was originally published on Jan. 27, 2016, and was updated on March 19, 2018, and Jan. 25, 2019.
This content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
It's a new year so, if you own a business, you might be itching to move forward with exciting plans to take your business to the next level. That’s great — but don’t move so fast that you forget to take care of your self-employment taxes for 2018.
Do you owe self-employment taxes?
Well, that’s the first question you need to answer. In general, the IRS considers you self-employed if any of these conditions apply to you:
- You carry on a trade or business as an independent contractor or sole proprietor.
- You’re a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself — including a part-time business.
Sound familiar? If so, and if you made more than $400 during the year, you will need to file for self-employment taxes.
How do you file for self-employment taxes?
You’ll need to file a Schedule SE with the IRS. This means that if the net profit on Schedule C or Schedule C-EZ is more than $400, you will not only need to file a return, but pay self-employment taxes as well.
The profit is all money you charged your customers, less all the business-related expenses you incurred during the year. This would be the amount shown on line 31 on Schedule C or line 3 on Schedule C-EZ.
Schedule SE is divided into two parts — the short form and long form.
As you can guess, the short form is much simpler to fill out. To be able to use the short form, you cannot:
- have received wages or tips during the year.
- be a minister, member of a religious order, or a Christian Science practitioner who has received approval not to be taxed on earnings from being a minister, but will owe self-employment tax on other earnings.
- use an optional method to figure net earnings (as this is a bit more complicated, you probably will not want to do this).
- have received church employee income from form W-2 of $108.28 or more.
If the answer to any of these questions is “yes,” you have to use the long form.
The first thing to do to calculate your self-employment income is to put your net profit or loss from either Schedule C or Schedule C-EZ on Schedule SE in either the short or long form section. You will multiply this amount by 92.35% to get the taxable amount. If the amount is $128,400 or less, then multiply that amount by 15.3% to get your self-employment taxes for the year. If it's more than $128,400, multiply your taxable income by 2.9% and add to that total $15,921.60.
The amount you calculated goes on line 57 on your Form 1040 as part of the taxes you owe.
What if you have more than one business?
In this case, your net earnings from each business (or each Schedule C) are combined onto one Schedule SE.
If you and your spouse have self-employment income, you each would need to file a separate Schedule SE. The IRS requires that if one spouse qualifies and uses the short form, the other spouse must use the long form. However, since the short form and long form are on a single Schedule SE, only one Schedule SE needs to be filed.
Now for a bit of good news: You can claim an adjustment to income on line 27 of your 1040 for one-half of your self-employment income. This reduces your adjusted gross income, which should in turn reduce your taxable income (every little bit helps, right?).
A little intimidating? Maybe, but if you have powered through your first year of business, nothing should intimidate you. However, if you run into problems or have additional questions, seek the help of a good accountant.