According to IRS, you are considered self-employed if you carry a trade or business as the sole proprietor, an independent contractor, a membership of a partnership or if you are otherwise in business for yourself. Even though you are a full-time employee, you can still have self-employment from a side job. That being said, you can determine whether a side job is considered self-employment by looking at the source that income and the level of your involvement.
The self-employment tax code is complex and constantly changing and that can make it difficult to manage business finances while taking advantage of certain tax benefits. Each entity type has a different tax code to follow, and while in the company’s infancy an organization may choose one entity over another it may later be determined that changing the entity type would be advantageous. These reasons, along with others related to business accounting are the cause and culprit for the tax concerns of the self-employed.
Organizing Your Entity
It is recommended to form a legal organization complete with a federal tax ID number around virtually all businesses, unless it is your 8 year-old son’s lemonade stand. If it is not organized you would have to report your earnings on a Schedule C and that could result in a higher tax liability for you. Additionally, having a federal tax ID number allows you to provide customers with a W9 form with the tax ID number rather than your social security number. Select the entity type based on the self employed tax advantages that best suit your business. The various entity types include:
- Sole Proprietorship
- Limited Liabilty Corporation (LLC)
- Limited Liability Partnership (LLP)
As a small business owner, learning to keep track of income and expenses is essential to provide accurate financial reports. When tax season arrives and it comes time to prepare a return in the name of your business, it’s necessary to have records that describe the revenue that was earned during the fiscal year. Dates, invoices, and an itemized list of the products or services that were provided are all necessary details that must be included in financial records. If you choose to do it yourself, there are some accounting software packages that make this process relatively simple.
In addition to making sure revenue is recorded accurately, it’s important to record expenses carefully. Like revenue, expense tracking is a simple process. It includes recording the date an expense was incurred, who was paid, and what the purchase was. Once you have these pieces of information you can categorize the expense so it hits the appropriate account. Having income and revenue recorded routinely throughout the year makes processes at fiscal year-end a lot more manageable.
Planning income and expenses can and should be done well ahead of tax filing deadlines. It can help you determine the appropriate entity type for your business and it can help you determine if it would be advantageous to restructure. It can also provide you with planned deductions so you can decrease your tax liability at the end of each quarter for quarterly filers, and at the end of the fiscal year.
Note: Evan Aoki is a feature contributor for Theprointern.com where he likes to report on subjects where life meets money.