Definition
Self-employment income refers to the earnings generated by individuals who are self-employed, meaning they work for themselves rather than being employed by a company or organization. This type of income can derive from various sources, including trade, business, freelance work, or any work done as an independent contractor. Self-employed individuals are responsible for paying taxes on their earnings if their net profit from the trade or business is at least $400 for the year. In some cases, net earnings of less than $400 can still be counted for Social Security purposes.
Examples
- Freelance Writers: Individuals who write articles, blog posts, or books for various clients and are paid per project or on a contractual basis.
- Independent Consultants: Professionals who offer expert advice in specific fields such as business management, IT, or marketing, and get compensated by various clients.
- Small Business Owners: Individuals who own and operate small retail stores, restaurants, or other small businesses.
- Gig Economy Workers: People who work as drivers for ride-sharing services, offer services on freelance platforms, or perform short-term jobs.
Frequently Asked Questions (FAQs)
1. What is the threshold for self-employment income to be taxable?
The net profit from the trade or business must be at least $400 for the year to fall under taxable self-employment income.
2. Do self-employed individuals have to pay both Social Security and Medicare taxes?
Yes, self-employed individuals must pay both Social Security and Medicare taxes through the self-employment tax, which is generally 15.3% for 2023.
3. Can self-employment income be reported if the net earnings are under $400?
While typically net earnings under $400 do not require self-employment tax, certain specific conditions might necessitate reporting such earnings for Social Security purposes.
4. How do self-employed individuals report their income?
Self-employed individuals report their income on IRS Schedule C (Profit or Loss from Business) or Schedule C-EZ and pay the self-employment tax using Schedule SE.
5. Can expenses be deducted from self-employment income?
Yes, self-employed individuals can deduct ordinary and necessary business expenses from their gross self-employment income to arrive at net profit.
Related Terms and Definitions
- Net Profit: The amount remaining after all operating expenses are subtracted from gross income.
- Schedule C: A tax form used to report income or loss from a business operated or a profession practiced as a sole proprietor.
- Self-Employment Tax: A tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.
- Freelancer: An individual who earns income by working on different jobs or projects for various clients without committing to a single, long-term employer.
Online References
- Internal Revenue Service (IRS) - Self-Employed Individuals Tax Center
- Social Security Administration - If You Are Self-Employed
- Investopedia - What Is Self-Employment Income?
Suggested Books for Further Studies
- Tax and Accounting Strategies for the Self-Employed by Clarity Sanders, CPA
- The Self-Employed Life: Business and Personal Development Strategies That Create Sustainable Success by Jeffrey Shaw
- J.K. Lasser’s Small Business Taxes 2023: Your Complete Guide to a Better Bottom Line by Barbara Weltman
Fundamentals of Self-Employment Income: Business Basics Quiz
Thank you for exploring the comprehensive guide to self-employment income. Holding onto this knowledge will prove useful as you navigate the complexities of self-employment taxes and Social Security contributions. Keep building your expertise!
