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Are you self-employed?

For federal tax purposes, you are self-employed if:

• You own, by yourself, a business that has not been incorporated—also called a “sole proprietorship.”
• You are an independent contractor. Whether or not you meet the definition of an independent contractor for IRS purposes is not always clear and depends on the circumstances. The general rule is that you are an independent contractor if the person that pays you has the right to control the result of your work, not what will be done and/or how it will be done. You are not an independent contractor if the details of your services (what will be done and how) are controlled by the person or organization that pays you. In that case, you are an employee and not an independent contractor. 
• You are a member of a partnership that runs a trade or business. You don’t have to be making profit, but profit should be the goal.
• You run a part-time business. For example, Jane is employed full time as an engineer and, on weekends, she is self-employed as the owner of a repair shop. She fixes televisions and radios in her own shop, using her own equipment and tools. Jane gets customers from advertising and word of mouth. She is self-employed as the owner of a part-time repair shop.

What taxes must I pay if I’m self-employed?

If you are self-employed, making more than $400 in annual income, you should file a tax return at the end of the year. Further, you are required to pay “estimated quarterly taxes” four times per year. This is because you are getting paid directly by clients and no withholding tax has been taken from your income. Withholding is the amount an employer withholds from your pay and sends to the government as partial payment toward yearly income tax. When you are self-employed, you must pay your own withholding.

The types of tax you will likely pay are 1) self-employment tax, and 2) income tax. The self-employment tax is used to pay into Social Security and Medicare benefit programs.

Generally, you file an income tax return and pay income tax if your net earnings are $400 or more. To calculate your net earnings, subtract your business expenses from your business income. If your expenses are more than your income, you have a net loss. If your business expenses are less than your business income, you have a net profit or net earnings. 

For example, Bob cleans houses for a living. He earned $1,000 per month, or $12,000 for the year. However, he spent $500 on business expenses, such as rags, cleaning products, and vacuum cleaner bags. Therefore, Bob’s net yearly income was $11,500 ($12,000 earned minus $500 in business expenses). Because $11,500 is more than $400, Bob must file a tax return at the end of the year.

How do I make estimated quarterly payments?

Because self-employment income is not subject to withholding, you must estimate your own taxes. To do that, you need IRS Form 1040-ES, Estimated Tax for Individuals. Once you’ve estimated your taxes using this form, use the attached vouchers to mail your estimated tax payment. Or, pay your taxes online using the Electronic Federal Tax Payment System. The table below lists due dates for quarterly taxes. Note that due dates can sometimes fall on holidays or weekends, causing a shift in due date to the next business day.

What happens if I fail to pay my estimated quarterly payments?

If you don’t pay your estimated quarterly payments, don’t pay enough, or pay late, the IRS may charge you a penalty, even if you are due a refund at the end of the year. 

What is an “information return,” or IRS Form 1099-MISC?

The 1099-MISC form is used to report income you received from someone you worked for, who was not your direct employer. For example, if Keith did landscaping as an independent contractor, the person who hired him would be required to give him a 1099 form showing how much he was paid. Many self-employed individuals have jobs like landscaping and construction and do not have a consistent wage or employer. Instead of W-2 forms, they receive 1099 forms from individuals or businesses for whom they have worked. You should receive your 1099 forms by January 31.

A payer is only required to send you a 1099 form if they paid you more than $600. However, even if they don’t send you a form, they will likely report the earnings to the IRS. You must still report all self-employment income on your tax return even if you do not have a 1099 form for the work you did.

If you are expecting a 1099 form and do not receive one by the end of the year, contact the individual or business. If you believe an individual or business that provided a 1099 made a mistake, you should contact them to get it corrected. If you cannot do so (for example, if they refuse to make the correction), send a letter with your tax return to report the correct income to the IRS.

Where can I get help filing my taxes?

The IRS Free File Program makes commercial tax preparation software available to low-income taxpayers at no cost. If you had less than $62,000 in adjusted gross income in 2018, Free File will help you complete and return your tax return at no cost. The 2019 income limit has not been released yet.

Volunteer Income Tax Assistance (VITA) generally offers free tax preparation services to people with incomes below $54,000. The income limit for 2019 has not been announced yet.

Tax Counseling for the Elderly (TCE) offers free tax help for all taxpayers, particularly those age 60 and older.

To find a VITA or TCE site near you, call 1-800-906-9887 or 211, or visit Free Tax Return Preparation for Qualifying Taxpayers (from IRS.gov). The centers should be open throughout New Jersey in January 2020. 

More questions?

The Tax Legal Assistance Project, TLAP, at Legal Services of New Jersey provides assistance and representation for self-employed individuals. For help, call 888-LSNJ-LAW. You may also find more information at Self-Employed Individuals Tax Center (from IRS.gov). ​​​​​

This information last reviewed: Nov 4, 2019