Self Employed? How to File a Self Employment Tax Return

What is self-employment?

 You are considered self-employed if you:

• Work as an independent contractor
• Are the sole proprietor of a business
• Practice a trade as your business
• Work a side gig that is based on your time, and you provide the necessary tools to do the work
• Are, in some way or another, in business for yourself

Do I need to file a 1040 or Schedule C if I’m self-employed?

Yes, you will need to file Form 1040. You will also need to include Schedule C with your tax return. These are the required forms when you are self-employed. You may need other forms, such as Schedules 1 and 2, Schedule SE, Form 4562, 1040-ES  and others. If you’re not sure which documents do or do not apply to you, ask a tax professional for help. Jackson Hewitt’s Tax Pros can help you determine which deductions make sense for your specific work situation.

What is my tax ID number for my business?

Your personal tax ID number is your Social Security number (SSN). Your business may have a unique employer identification number (EIN) as well, and you must apply for the number. If you don’t have any employees and your state doesn’t require a separate number, you can use your SSN for reporting your self-employment income. If you have employees or are otherwise required to, you must complete an online Form SS-4 (the EIN application) with the IRS to get an EIN.

My spouse and I are joint owners of a business — do we have to file as a partnership?

The IRS has special rules for a married business team. If you and your spouse are the only workers in a business you both operate and work, you can treat yourself as a qualified joint venture and file two Schedules C, Profit or Loss From Business, or Schedules F, Profit or Loss From Farming, splitting all income and expenses.

If you use your vehicle for business purposes, you may be able to deduct expenses associated with such use. You may recover your investment in certain business-related properties (such as equipment, a vehicle, or a building) through the use of depreciation.

What can I deduct from my side hustle, or self-employment income?

There are many expenses you can deduct from your business:

• Your vehicle if you use it for business purposes. You may choose the actual expense method or use the standard mileage rate. If you choose the actual expense method, you must also keep track of your vehicle-related expenses for the year. Vehicle-related expenses include gas, oil, insurance, repairs, cleaning, and registration. The business portion of your personal property taxes and vehicle loan interest is also deductible. Whichever method you choose, you must keep track of the mileage on your car from the first day of the year, or the first day you use your car for business, through the end of the year.
• Your employees' wages and salaries are deductible if they are paid during the tax year for work directly related to your business and the pay is reasonable. You must be able to verify that the payments were made for duties actually performed. There are various types of withholding for different types of employees. Specific forms must be used for reporting payments made to employees.
• Advertising expenses including business cards, billboards, car wraps, ad agencies, etc.
• Office supplies you purchase to operate your business.
• Rent paid for equipment, storage, or office space.
• Banking fees, credit card/debit card fees.
• Legal fees associated with your business.
• Professional fees such as bookkeeping, taxes, accounting, etc.
• Cleaning and maintenance, including minor repairs, like having a plumber fix a leaky faucet.
• Membership dues such as Chamber of Commerce, local small business association, or trade groups.
• Publications and books on the business or for the business--like magazines in a waiting room.
• Costs incurred when setting up an active trade or business, investigating the possibility of creating or acquiring a business, and some legal fees. You can choose to deduct up to $5,000 of business start-up costs now and claim a deduction of the remaining cost over 15 years. Franchise fees, goodwill, and certain other expenses are also amortizable.

IRS regulations do not allow taxpayers to deduct the full cost of assets used in a business the year they are purchased, instead, they allow depreciation, which is a percentage of the asset to be deducted each year over a pre-determined “life” of the asset. There are some rules in place that allow for a greater upfront deduction, such as the Special Bonus Depreciation and Section 179 deduction.

What are some tax changes this year?

• The Section 179 deduction allows taxpayers to deduct all, or part of, assets purchased and placed in service in a business for the year. In the 2023 tax year (taxes filed in 2024), the deduction increases to $1,160,000 (from $1,080,000) worth of assets placed in service. The IRS increased the types of assets you can claim, or expense, under this method as well.
• You may also claim a special depreciation of 80% of the value of the property you placed in service during the year. This is different from the Section 179 deduction but does increase your allowed deduction of tangible property.
• Up to 100% of the medical insurance costs you pay for yourself, your spouse, and your dependents may be deductible as an adjustment to income on Form 1040, U.S. Individual Income Tax Return. The deduction is subtracted directly from your total income and applies whether you itemize. If you purchase your health insurance through the Marketplace, you may have to adjust your deduction for your Premium Tax Credit.
• Business tax credits can reduce your tax liability, or how much you pay in taxes. There is a credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates.

Other benefits of self-employment

• You may be able to deduct 20% of the profit in your business—called Qualified Business Income Deduction (QBID)--to help reduce your income taxes.
• You can deduct one-half of your self-employment taxes on your tax return.

Some additional tax considerations for small business owners

• If your net profit is greater than $400, you must pay self-employment (SE) taxes. Use Schedule SE, Self-Employment Tax, to calculate the taxes and report on Form 1040, Schedule 4, Other Taxes. The SE tax is a self-employed individual’s equivalent of the payroll taxes withheld by employers.
• If you are self-employed, you must pay your own Social Security and Medicare taxes and you will pay the equivalent of the employee and employer’s share, which is 12.4% for Social Security tax and 2.9% for Medicare taxes. Social Security taxes max out on wages and SE taxes of $160,200 (was $147,000). You will still pay Medicare taxes on income greater than this, but no Social Security taxes.
• There is an additional Medicare tax of 0.9% for self-employed taxpayers who have a total earned income of more than $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

If you’re working in America’s rapidly expanding gig economy, knowing the tax deductions and credit you might qualify for can help you prepare for tax season and encourage you to keep track of your job-related spending throughout the year. Stay informed and stay on top of your taxes by locating an office near you. Our Tax Pros are happy to answer any questions you may have on self-employment tax deductions.