For some, calculating self-employment income is as easy as totaling up the amounts on their 1099-MISC forms, but for others, it's not that simple. And while you'll likely want to consult a tax specialist or the IRS about specific questions, this article goes over some of the basic points of self-employment income, so you can be more informed on your day-to-day business decisions.
Key Takeaways
- Income earned as a sole proprietor, independent contractor, or as part of a partnership is considered self-employment income by the IRS.
- Earnings for which you receive a W-2 are not considered self-employment income.
- Add the amounts in Box 7, titled "Nonemployee Compensation" from the 1099 forms you receive to calculate your total self-employment income.
How the IRS Defines Self-Employment Income
Self-employment income is earned from executing a "trade or business" as a sole proprietor, an independent contractor, or some form of partnership. Freelancers and "gig workers" are also considered by the IRS to be self-employed. To be considered a trade or business, an activity does not necessarily have to be profitable, and you do not have to work at it full time, but profit must be your motive. For those who don't have profit as a motive, an activity could be considered a hobby and not a business. However, the IRS defines a hobby narrowly, so be sure you understand the rules regarding profits and losses from a hobby.
The Difference Between Self-Employment and Employment
The IRS considers many factors when differentiating between activities it considers employment and contracting. Employees, even if they work at home, are not only directed by their employers in what work should be done but also how and when to do it. Employees usually receive regular paychecks, payroll taxes are taken out, and the employer pays half of their Medicare and Social Security taxes. Employees must earn minimum wage and will receive a W-2 at tax time.
Independent contractors are not as closely supervised as employees, though they may work in an office. They often, but not always, receive work on a project basis and may or may not be paid hourly. Independent contractors are not subject to minimum wage laws, they pay all of their own Social Security and Medicare taxes, and they receive 1099-MISC, not a W-2.
Calculating Self-Employment Income
If you receive 1099 forms, tally up the totals in Box 7, titled "Nonemployee Compensation." You will only receive a 1099 form if you earned more than $600 from a company, but you'll still have to report all income less than that, so keep accurate financial records.
If you have a business that sells goods, you will need to calculate your gross income, which can be done by subtracting the cost of goods sold from revenue—taking into account returns and allowances. Keep accurate records and receipts to be sure you are accounting for all of your costs and sales. All of this is done on Schedule C.
Note
Although most contractors will use Schedule C, farmers should use Schedule F to report their self-employment income and those engaged in a partnership should use Schedule K-1. After you've calculated your income, you will need Schedule SE to calculate the self-employment tax.
What Is Not Considered Self-Employment Income
Income for which you received a W-2—which would mean you are an employee—should not be calculated as self-employment income. The same goes for income received from an activity that fits the IRS' definition of a hobby. Income from dealing and brokering investment securities, interest, and dividends are also not considered self-employment income.
Frequently Asked Questions (FAQs)
What does the IRS consider self-employment income?
According to the IRS, any income that comes from the "performance of personal services, but cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee" is considered self-employment income. In other words, any earnings you make for which you do not receive a W-2 are considered self-employment income by the IRS.
Do you need to file self-employment taxes if you earned less than $600?
Yes, the IRS requires you to report all income from all sources during each calendar year regardless of how much you earned from each source. Businesses are only required to file Form 1099 if the contractor earns more than $600. However, you should maintain your own records to avoid being audited by the IRS.
FAQs
The net income you earn from your own trade or business. For example, any net income (profit) you earn from goods you sell or services you provide to others counts as self-employment income. Self-employment income could also come from a distributive share from a partnership.
How to prove income as self-employed? ›
Some ways to prove self-employment income include:
- Annual Tax Return (Form 1040) This is the most credible and straightforward way to demonstrate your income over the last year since it's an official legal document recognized by the IRS. ...
- 1099 Forms. ...
- Bank Statements. ...
- Profit/Loss Statements. ...
- Self-Employed Pay Stubs.
All self-employed persons must report the income earned from their business operations as business income, and not as salary. The business income is part of the total personal income which is taxed at individual income tax rates.
How do you write self-employment income? ›
There is no W-2 self-employed specific form that you can create. Instead, you must report your self-employment income on Schedule C (Form 1040) to report income or (loss) from any business you operated or profession you practiced as a sole proprietor in which you engaged for profit.
What is not included in self-employment income? ›
Gain or loss from the sale or exchange of property that is not stock in trade or held primarily for sale is excluded from net earnings from self-employment income, as is gain or loss from the sale or exchange of a capital asset.
Is rental income self-employment income? ›
Rents from real estate (including any personal property leased with real estate) received by a taxpayer who holds the property for investment are not included in self-employment income unless the rent is received in the course of the taxpayer's trade or business.
How can I prove income without paystubs? ›
Here are options for showing proof:
- Employment verification letter. ...
- Signed offer letter. ...
- W-2s, 1099s, and tax returns. ...
- Official statement/letter from a CPA or trust manager. ...
- Bank statements. ...
- College financial aid documents. ...
- Guarantor.
Whether you're looking for a car loan or some other type of financing, you'll need trustworthy documents — pay stub, tax documents like W-2, a letter from your employer, or a bank statement — where the lender will be able to verify your cash income, especially if you don't have good credit.
Can I use bank statements as proof of income? ›
Bank statements are one way to demonstrate your income sources. But you should ask for certified bank statements if you will use bank statements for income verification to avoid fake bank statements.
Is self-employment income the same as business income? ›
For sole proprietorships, partnerships, and limited liability companies, the self-employment taxes are imposed on your net self-employment income, which basically is just your business income reduced by your business deductions.
What's the difference between self-employment income and other income?
| Category | Self-Employment Income | Other Income |
|---|
| Taxation | Subject to self-employment tax (Social Security and Medicare) | Taxation varies based on the specific type of other income |
4 more rowsOct 15, 2023
Use Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment. The Social Security Administration uses the information from Schedule SE to figure your benefits under the social security program.
Who qualifies for self-employed tax credit? ›
Conducted a trade or business that qualified as self-employment income in 2020 and/or 2021. This category encompasses sole proprietors, 1099 subcontractors, freelancers or gig workers, and single-member LLCs.
Will I get a tax refund if my business loses money? ›
If you open a company in the US, you'll have to pay business taxes. Getting a refund is possible if your business loses money. However, if your business has what is classified as an extraordinary loss, you could even get a refund for all or part of your tax liabilities from the previous year.
What is considered self-employment income for Social Security? ›
You're self-employed if you operate a trade, business, or profession, either by yourself or as a partner. You report your earnings for Social Security when you file your federal income tax return.
Can you be self-employed and not own a business? ›
Being self-employed is possible without having a formal business entity like a partnership, S corporation or limited liability company. A sole proprietorship is the most basic type of business structure, and these don't have any kind of structure at all.
How much income can a small business make without paying taxes? ›
Income of $400 or less after deductions
Generally, self-employed individuals must pay a self-employment tax to make sure they pay their portion of FICA taxes based on their annual income. But, if your net earnings from self-employment were less than $400, you don't have to file a business tax return.
Is DoorDash self-employment income? ›
Are food delivery couriers self-employed? If you deliver food for GrubHub, Postmates, DoorDash, or UberEATS, you are self-employed. As a delivery provider for these companies, you are an independent contractor rather than an employee. As an independent contractor, you provide delivery services to individuals.
