How to Report Self Employment Income in 2021
Self-employed individuals, like other business owners, must report their income and pay taxes to the IRS. Questions abound when it comes to self-employment taxes.
What qualifies as self-employment income? Is there a specific way to report your self-employment income? What do you need to do before this? Is there a specific form that needs to be completed?
Find out the answers to these questions and many more in a detailed guide prepared by TFX.
What is self-employment income?
Let's take a quick look at what self-employment income is before we get into how to report it.
So, what is meant by self-employment income, and how is it calculated? Income that self-employed people who run a business can make is referred to as self-employment income. Sole proprietorships and independent contractors are typically included in this category.
Members of a partnership can also be included. Self-employment is not permitted for corporations or enterprises taxed as corporations.
People who work for themselves are known as self-employed. The result is that owners of small businesses are taxed differently than those of larger corporations. Taxes on self-employment income and reporting business revenue are still the responsibility of workers.
The following are not included in the self-employment income:
- W-2 income
- Income generated from a hobby
- Dividends and interest payments (unless it involves dealing and brokerage investment securities)
Is there a W-2 for reporting income and paying self-employment taxes?
Self-employed people pay the same income tax as those who work for a company and get paid in the form of wages or a salary. For those who are self-employed, the difference is not in the amount of income taxed but in the fact that no employer will be withholding this tax from each paycheck. As a self-employed person, you will be responsible for preparing your taxes and filing self-employment tax returns.
Self-employment income is not reported on Form W-2. You can't make your own customized version of the W-2 for self-employed individuals. Schedule C (Form 1040) must be used instead to record any income or (loss) from any business or profession that you operated or practiced as a sole proprietor for profit.
How to report self-employment income?
Individuals who are self-employed must record their earnings on a specific form, depending on their business structure and circumstances. In addition, they must determine and report self-employment tax.
In terms of reporting self-employment income, where do you start?
1. Gathering Information
Self-employment income must be reported on a tax form. To begin, however, you'll need to acquire some information first. Depending on the form you need to fill out, the information you provide may vary; however, the following is a general guideline:
- Expenses incurred in the course of business
- Income reported on 1099-MISC forms by people you offered services to
- Financial statements
2. Filling the Right Form
Self-employment income can be reported in a variety of ways, depending on the nature of your firm. Generally, self-employed individuals are required to utilize Schedule C, Profit or Loss from Business, to record their self-employment income to show profit or loss. This is the most common form of income reporting for sole proprietorships and single-member LLCs.
Despite the fact that Schedule C is the most popular form for reporting self-employment income, it is not the only one. Here are a few more and who is required to utilize them:
- Schedule F is for farmers
- Schedule K-1 is for partnerships and LLC compromising of many members
How to complete Schedule C?
You must complete Schedule C in order to report your self-employment income to the IRS. Use this form to report how much money you made or lost in your business during the tax year. Here is what you would require to fill out the form:
1. Name
2. Social Security Number
3. Business and Business name (if it is applicable)
4. Your Business Address
5. Accounting Method employed
6. Your EIN (Employer Identification Number)
The form also has some “Yes or No” questions about the business.
Once the introduction section of the form has been filled, you can move to the next sections. These include:
Part I: Income
Your gross revenue is calculated in this area. The first step is to list all of your gross receipts or sales for the year, including any sums recorded on 1099 forms issued by clients or other parties for whom you provided services.
To arrive at gross income, add together all of these products and remove your cost of goods sold (which is calculated in Part III and discussed below).
Part II: Expenses
When it comes to filing your taxes, here is when keeping meticulous records can really pay off. You can write off expenses paid over the year, including the following:
- Marketing costs
- Supplies
- Legal Costs
- Maintenance and Repairs
- Expenses for the office
Here are other expenses that you can write off based on your situation.
- Transportation expenses
- Section 179 expense deduction and depreciation
- Plans for retirement and profit-sharing
- Travel, food, and entertainment costs
- Wages
- Bonus Depreciation
- Expenses for using your home for business purposes
Part III: Costs of Sold Goods
This section only concerns those businesses that sell goods to customers. If you're a consultant, yoga teacher, software programmer, daycare facility owner, or any other service-based business, you may skip this section and move on.
Begin by reporting the worth of your inventory at the start of the fiscal year. This amount is usually similar to what you reported for closing inventory on Schedule C from the previous year.
The following costs should be reported and added to the beginning inventory:
- Merchandise, but don't include anything that has been withdrawn from sale or used for your own purposes.
- Wages that have been paid to production workers, supervisors, and others in the manufacturing and construction industries.
- Supplies and other overhead costs.
Deduct the value of your closing inventory from that total. Your cost of goods sold will be the final tally. To minimize your gross income, enter that amount in Part I.
Part IV: Vehicle Information
It's here that you tell the IRS about any vehicles you used in Part 2 and that you're deducting expenditures for. When the IRS reviews your deductions, they look at the responses to this part. This means, for example, that you need to have written proof of your deduction in order to answer yes to the question. Do not be surprised if the IRS asks for proof of your deduction if you say no.
Part V: Other Expenses
Expenses that fall outside of the categories indicated in Part II should be detailed and reported on the "Other Expenses" line in Part V. These can include:
- Memberships costs
- Subscriptions
- Fees paid to third parties for transactions processing
Conclusion
Self-employment gives you freedom over your schedule and is liberating. However, when the tax season comes, reporting self-employment income on taxes can be a daunting task if you are not adequately prepared for it. While being organized and keeping records of all your expenses can save you a lot of money, it is equally important to seek professional guidance when it comes to claiming self-employment income on taxes.