A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Leonard Holler, Wyoming Entrepreneur WSBDC regional director
“What are my tax obligations when running my own business?” Jim, Lander
Here is a summary based on a recent article from the IRS.
Being self-employed typically means you work for yourself as an independent contractor owning your own independent business. Listed are key points about self-employment and self-employment taxes:
Self-employment income can include pay that you receive for full- or part-time work for a variety of customers. This could include income earned in addition to a regular job from your home or from a separate location.
Self-employed individuals must file a Schedule C, Profit or Loss from Business, or a Schedule C-EZ, Net Profit from Business, with a Form 1040. These forms are used to calculate net earnings from the business.
When filing these forms, deduct the business expenses or costs paid to run your trade or business. You can deduct most business expenses in full, but some costs may need to be allocated between personal and business use. They might even need to be “capitalized,” which means deducting only a portion of the expense each year over a period of years. Expenses can only be deducted for costs that are both ordinary and necessary. An ordinary expense is common and accepted in your industry. A necessary expense is helpful and appropriate for your particular trade or business.
Being self-employed means having to pay self-employment tax and also income tax on earnings from the business. Self-employment taxes include both Social Security and Medicare taxes. Computing the tax is based on net income or profits from a business using a Schedule SE, Self-Employment Tax form.
A small business owner also may be required to make estimated tax payments. Some owners make estimated tax payments to pre-pay the taxes on income that has not been subject to employer withholding, such as wages.
If no estimated tax payments are made, you may be required to pay an underpayment penalty when filing an income tax return. This is only if you underestimated potential tax liability by too much and did not pay enough taxes during the year. Estimated tax payments are made with Form 1040-ES, Estimated Tax Payment voucher.
For more information, visit the Small Business and Self-Employed Tax Center on the IRS website at www.IRS.gov. Several IRS publications are available online, but help also is available by calling 1-800-TAX-FORM (800-829-3676).
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.
