Tax Considerations for the Self-Employed

Tax Considerations for the Self-Employed

Every individual taxpayer is ultimately responsible for filing and paying their own taxes. This burden carries additional obligations, however, when the taxpayer is self-employed.

According to the IRS, you are self-employed if “you carry on a trade or business as a sole proprietor or an independent contractor.”

You are generally considered self-employed if any of the following apply:

• You carry on a trade or business as a sole proprietor or independent contractor
• You are a member of a partnership that carries on a trade or business
• You are otherwise in business for yourself (which includes a part-time business)

A sole proprietor is defined as “someone who owns an unincorporated business by himself or herself.” An independent contractor is defined as someone who is “in an independent trade, business, or profession in which they offer their services to the general public.” In general, you are an independent contractor if the person paying for your work has the right to control only the result of the work and not how the work will be done.

For more information about independent contractors versus employees, see IRS Publication 15-A (Employer’s Supplemental Tax Guide).


Tax Considerations for Self-Employed Individuals

When starting a business, you must determine what type of business entity you’re going to establish. Common business structures for the self-employed include sole proprietorships, partnerships, limited liability companies (LLCs), and S-corporations.

Self-employed individuals are generally subject to income tax as well as self-employment (SE) tax. If you are self-employed, you are usually required to make estimated tax payments and file an annual tax return.

To find out if you are liable for income tax and self-employment tax, you must calculate the net profit/loss from your business. You can do this by subtracting your business expenses from your business income. If your expenses are greater than your income, the difference is considered a ‘net loss,’ which may be tax-deductible. Conversely, if your expenses are less than your income, the difference is called a ‘net profit’ and must be reported on Page 1 of your Form 1040 (U.S. Individual Income Tax Return).

For more information on tax obligations for the self-employed, see IRS Publication 334 (Tax Guide for Small Businesses).


If you cannot file your tax return on time, make sure you file a tax extension to avoid IRS penalties.