Tuesday, November 1, 2022
HomeAccountingWhat Does Self-employed Mean? | Are You Self-employed?

What Does Self-employed Mean? | Are You Self-employed?


You run your own business, but are you considered self-employed? The definition of self-employment can be confusing.

What does self-employment mean? Find out below.

Self-employed meaning

Self-employed people are those who own their own businesses and work for themselves.

According to the IRS, you are self-employed if you act as a sole proprietor or independent contractor, or if you own an unincorporated business. This means you are self-employed if your business is one of the following business structures:

  • Sole proprietorship
  • Partnership
  • Limited liability company (LLC)

Who is not self-employed?

Other business structures do not have self-employed people, even if you are the owner. Corporations do not have self-employed people. This includes partnerships and LLCs that are taxed as corporations.

Accounting software that’s easy to set up and use!

  • Easy onboarding with startup wizard
  • Import your customers, vendors, trial balance, and Chart of Accounts
  • Free USA-based accounting

Business taxes for the self-employed

When you are self-employed, you must still pay business income taxes. In this case, the taxes pass through the business and on to you. You pay taxes on business income with your personal tax return. These are called pass-through taxes.

Below is more information about how to pay business taxes when self-employed.

Sole proprietorships and single-member LLCs

Sole proprietors and owners of a single-member LLC must report business profits, losses, and taxes on Schedule C or Schedule C-EZ of their Form 1040. You will send in the Schedule C when you submit your personal tax return.

Partnerships and multiple-member LLCs

Partners in a partnership and members of a multiple-member LLC must first prepare Form 1065, U.S. Return of Partnership Income. Then, the business should give a Schedule K-1 of Form 1065 to each member. Schedule K-1 shows each partner’s share of the business’s profits and losses.

When the members file their personal tax returns, they should include information from Schedule K-1. This information will help determine how much each member owes in taxes on the business’s income, Social Security tax, and Medicare tax.

Estimated taxes

When an employee is paid, the employer withholds taxes from their paychecks. But when a self-employed person is paid, there is no one withholding taxes from the payments.

Instead, self-employed individuals must pay estimated taxes, especially if they anticipate owing $1,000 or more when filing their income tax returns. These estimated taxes will go toward your personal and business income taxes.

You can use Form 1040-ES to calculate and pay your estimated taxes. Estimated taxes are due on a quarterly basis.

Business expenses

You can deduct the costs of operating your business. To deduct a business expense, it must be both ordinary and necessary.

Recordkeeping

You should keep all accounting records to help you complete your taxes. This includes your income statement, invoices, bank statements, receipts, etc. You can look these over if you have any questions or discrepancies when reporting and paying your taxes.

Having accurate records can help you take business tax deductions, such as mileage and travel expense deductions. By looking at your records, you can determine if you qualify for deductions and how much you can deduct. The records also serve as proof that you deserve the deductions, in case you are audited.

Small business accounting software will help you track your business profits and losses. With Patriot Software’s accounting software, you can easily record payments, track expenses, and create invoices. Try it for free today!

This article is updated from its original publication date of June 12, 2018.

This is not intended as legal advice; for more information, please click here.



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments