Self-employment income means you need to become familiar with IRS tax compliance requirements ... to avoid getting into deep dodo.
Sole proprietors must pay self-employment tax on their net earnings. Here is basic information you need to get you started on the right foot.
Small Business Deadlines
Interest Rates and More
Self Employment Income
Standard Mileage Rates
When accounting for self employment income, it is important to understand the constructive receipt principle.
Under the doctrine of constructive receipts, cash basis taxpayers (as opposed to accrual basis taxpayers) are not permitted to receive/write postdated or predated cheques.
The doctrine of constructive receipts is defined in the regulations but was conceived by the courts to test realization of income. It prevents a cash basis taxpayer from selecting the year in which income will be reported. Its purpose is to prevent tax avoidance.
For tax purposes, a cheque is constructively received when it is delivered to the taxpayer ... not when it is cashed.
Source: Barriers to the application of the constructive receipt doctrine by Knight, Lee, G, Knight, Ray A. published in Tax Executive on January 1, 1989
This is the method used to pay income taxes on income not subject to withholding taxes ... i.e. your self employment income.
You need to pay estimated taxes four times if your expected tax is $1,000 or more in 2018 after subtracting withholdings and credits ... AND you expect your withholding and refundable credits to be less than the smaller of:
You may be charged a penalty if you don't pay enough tax by each due date. If you like smoothing out your cash flow over the year, you can setup monthly payments on EFTPS instead of the four required payments.
Keep in mind that most tax rates decreased in 2018 when calculating the amount you owe.
|Tax Type||Tax Period||Form to be Filed||Filing AND Payment Deadline|
|Annual Est. Payment Farmers, Fishermen||2018||1040-ES||January 15, 2019|
|4th Tax Installment|
pay thru EFTPS
|January 15, 2019*|
|1st Tax Installment|
pay thru EFTPS
|April 15, 2018|
|2nd Tax Installment|
pay thru EFTPS
|June 15, 2018|
|3rd Tax Installment|
pay thru EFTPS
|September 17, 2018|
*You don't need to pay the January 15 estimated tax payment if you file your 2018 tax return
with taxes due by January 31, 2019. However, if you do need to make a
payment, best practice is review your estimated earnings and payments
made to date. Adjust your fourth payment to ensure you aren't
under paying or over paying your tax. IF you choose to write a cheque rather pay online through EFTPS ... although why you would choose this payment method is beyond me ... the cheque is made payable to United States Treasury.
See the IRS Estimated Taxes Guide for more small business information on estimated taxes located on their website by entering "Estimated Taxes" into the search box. It is a lot easier than trying to find things on the redesigned site ... you sometimes have to go 4 to 6 levels deep to get what you want now!
For example take a look at following links to Estimated Taxes: IRS> File> Business and Self Employed (on left hand side navigation bar)> Self-EmployedIndividuals Tax Center > How Do I Make My Quarterly Payments?> find the inline text link for "Estimated Taxes" in the last paragraph.
You used to get there in three clicks ... Businesses> Self-Employed> If you are self-employed you must pay Estimated Taxes. Now it is six clicks!
There is also a good small business tax information article on Estimated Tax 101 at https://fairmark.com/general-taxation/estimated-tax/estimated-tax-101/. It walks you through the process and explains how to decide what is the best way for you to calculate your estimated taxes.
Self employment income is subject to FICA/SICA. What is the FICA tax rate for a self employed individual?
Well this is embarrassing! "Someone" (that would be me!) moved the data to a whole new page all it's own.
As you need to know this stuff, you'll find FICA rates for your self employment income here.
Source: IR 2019-02 and Rev.Proc. 2010-51
Normally released late November or early December each year; updated December 14, 2018
Earning self employment income often requires business travel. Here are the mileage rates allowed by IRS.
Table below is cents / mile
|53.5||54.0||57.5||56.0||56.5||55.5||51.0 1st 6 months
55.5 last 6 months
|20.0**||18.0**||Moving / Relocation Purposes||17.0||19.0||23.0||23.5||24.0||23.0||19.0 1st 6 months
23.5 last 6 months
|17.0||19.0||23.0||23.5||24.0||23.0||19.0 1st 6 months
23.5 last 6 months
|14.0||14.0||Charitable Services Rate||14.0||14.0||14.0||14.0||14.0||14.0||14.0|
*Tax Cuts and Job Act (TCJA) suspended the misc. itemized deduction from 2018 -2025; exceptions were made to members of a reserve component of US armed forces, state or local government officials paid on a fee basis and certain performing artists. See Notice 2018-42 for more information which modifies Notice 2018-03 and Notice 2019-2.
**TCJA repealed moving expense deduction for individual taxpayers from 2018-2025 except for US armed forces on active duty. See Notice and 2019-2 and Notice 2018-42 for more information which modifies Notice 2018-03.
***You cannot use the business standard mileage rate :
Vehicle means any car, van, pickup or panel truck. You always have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.
You do need a mileage log to support the number of miles your vehicle was driven for business purposes.
While you can't deduct actual vehicle operating costs (fixed and variable) under this method, you are allowed to deduct parking and toll expenses related to business, the business portion of interest paid on vehicle loans, and the business portion of any local or state personal property tax paid on the vehicle. (See IRS Revenue Procedure 2010-51 Section 4.03.)
Historical mileage rates can be found of on the IRS website at irs.gov> Tax Professionals> Standard Mileage Rates . If the page can't be found when you key it into your browser, do a search on the IRS website for "standard mileage rates". Choose the article titled Standard Mileage Rates ... following table summarizes ...
The standard mileage rates are based on an annual study by independent contractor Runzheimer International. The study based the business rate on the fixed and variable costs of operating a vehicle while medical and moving are based on the variable costs.
Additional small business tax information on using the standard mileage rate can be found in IRS Publication 463 Travel, Entertainment, Gift, and Car Expenses.
Part of earning self employment income necessitates entertaining potential and existing customers and clients. Section 274 of the tax code deals with the disallowance of certain entertainment, amusement or recreation expenses.
If you have a business meal at a club facility:
This section generally includes expenses relating to meals, travel and vehicle. Visit law.cornell.edu> US code> Title 26> Subtitle A> Chapter 1> Subchapter B> Part IX> Section 274 and Part VII> Section 212 for more details.
Section 162 states you must PROVE the expense is ordinary AND necessary to doing your business. You also have to provide proof the business expense has been paid.
No one said earning self employment income would be easy. This is a frequently audited area so know the rules.
If you made it this far, I think you've earned a nice, hot cup of tea. :o)
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