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Self Employment

Home Based Business

Self Employment

Here you will find resources that help self-employed individuals start and operate their businesses.

Starting a Business

10 Steps to Starting a Business

Starting a business involves making key financial decisions and completing a series of legal activities. This guide provides information to help you plan, prepare, and manage your business.

    Step 1:

    Research and Plan Your Business
    Use differnt tools and resources to help you prepare your business plan and become a successful business owner.

    Step 2:

    Get Business Assistance and Training
    Take advantage of free training and counseling services, from preparing a business plan to getting financing, and help expanding and relocating a business.

    Step 3:

    Choose a Business Location
    Get advice about choosing a customer-friendly location and complying with zoning laws.

    Step 4:

    Finance Your Business
    Find government backed loans, venture capital and research grants to help you get started.

    Step 5:

    Determine the Legal Structure of Your Business
    Decide whether you are going to form a sole proprietorship, partnership, LLC, corporation, non-profit or cooperative.

    Step 6:

    Register a Business Name ("Doing Business As")
    Register your business name with your state government.

    Step 7:

    Get a Tax Identification Number
    Learn which tax identification number you'll need to obtain from the IRS and your state revenue agency.

    Step 8:

    Register for State and Local Taxes
    Register with your state to obtain a tax identification number, workers' compensation, unemployment and disability insurance.

    Step 9:

    Obtain Business Licenses and Permits
    Get a list of federal, state and local licenses and permits required for your business.

    Step 10:

    Employer Responsibilities
    Learn the legal steps you need to take to hire employees.

How to Become an Independent Contractor

Learn how to legally operate as an independent contractor, including compliance with tax and employment laws.

Commonly known as consultants, freelancers and self-employed, independent contractors are individuals hired to do a particular job, receiving payment only for work being done. Independent contractors are business owners, and are not their clients' employees. They do not receive employee benefits or the same legal protections as employees, and often responsible for their own expenses.

Start Your Business

Like all other small business owners, you will need to follow some essential steps to starting your business. Getting proper tax registrations, business and occupational licenses and permits from federal, state and local governments are necessary to operate legally.

As an independent contractor, you will also want to create a standard agreement for your services. The U.S. Chamber of Commerce provides a sample agreement. You can find a number of other sample agreements on the Internet, but it is best to consult an attorney to draft one up specifically for your business, since your agreement will be a legal document between you and your client. Here a few sample contracts:

Find Business Opportunities

Large and small businesses, organizations and government agencies hire independent contractors for a wide variety of jobs, from professionals such as accountants and engineers to trades such as construction and trucking.

Operate Your Business

As an independent contractor you are responsible for paying your own taxes, Social Security, unemployment taxes, workers' compensation, health insurance, and other benefits. In addition, you and your client should understand the differences between an independent contractor and an employee as well as your legal rights and responsibilities.

Pay Your Taxes

Independent contractors must pay federal taxes on income and FICA; however, your client will not withhold taxes for you. As a business owner you will need to pay estimated taxes throughout the year instead of once a year on April 15th like employees.

Depending on the location of your business, you may be required to file state and local income and business taxes. Visit your state's tax agency to learn more about these requirements.

Are You an Employee or Independent Contractor?

Because you or your client call you an independent contractor doesn't mean that you are one. There are legal requirements that classify workers into employees and independent contractors. Before starting your first job (or even or next one), it's important to become familiar with these distinctions.

As an independent contractor you do not have the same legal rights and protections as employees:

  • You are paid for the work performed. Your clients are not required to pay employee benefits under the Fair Labor Standards Act (FLSA), including overtime and minimum wage
  • You are not covered under your clients' workers' compensation benefits
  • You are not entitled to receive your clients' employee benefits
  • You are not covered under Equal Employment Opportunity laws as they apply to your client's relationship with its employees
  • Your taxes are not withheld and paid by your client, including income, FICA and unemployment

If your client misclassifies you as an employee, they may be required to pay back taxes, and provide employee benefits, workers' compensation, unemployment, and more.

Just as your client should be very careful to distinguish between employees and contractors, so should you. If you feel you are being treated as an employee, complete Form SS-8 to ask the IRS to make a determination. If the IRS determines you are an employee, you should immediately contact an attorney. You may be able to file a lawsuit against the employer under FLSA, state unemployment or workers' compensation laws, and others.

Buying Franchises and Other Business Opportunities
Get tips, advice and rules about bying franchises and how to avoid scams.

Self Employment Assistance for Unemployed Workers
States pay a self-employed allowance, instead of regular unemployment insurance benefits, to help unemployed workers while they are establishing businesses and becoming self-employed. Participants receive weekly allowances while they are getting their businesses off the ground.

Financing a Business

Federal and state government agencies do not provide grants to self-employed individuals for starting a business. However, there are a number of low-interest loan programs that help individuals obtain startup financing.

Tax Information for the Self-Employed

  • Employer Identification Number
    An Employer Identification Number (EIN) is also known as a federal tax identification number, and is used to identify a business entity.
  • Small Business and Self-Employed One-Stop Resource
    Offers a broad range of state and local tax information including resources for specific industries, professions, self-employed entrepreneurs, employers and small businesses.
  • Online Classroom
    The Small Business/Self-Employed online classroom has a series of self-directed workshops on a variety of topics for small business owners.
  • Self-Employment Tax
    The Self-Employment Tax is a social security and Medicare tax for individuals who work for themselves.

What is Self-Employment Tax?

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

You figure SE tax yourself using Schedule SE (Form 1040). Social security and Medicare taxes of most wage earners are figured by their employers. Also you can deduct half of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.

SE tax rate. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Maximum earnings subject to SE tax. Only the first $102,000 of your combined wages, tips, and net earnings in 2008 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All your combined wages, tips, and net earnings in 2008 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

Fiscal year filer. If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.

Self-employment tax deduction. You can deduct half of your SE tax in figuring your adjusted gross income.  This deduction only affects your income tax.  It does not affect either your net earnings from self-employment or your SE tax. 

How to Pay Self-Employment Tax

To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN).  This section explains how to:

    • Obtain an SSN or ITIN
    • Pay your SE tax using estimated tax.

Obtaining a Social Security Number. If you never had an SSN, apply for one using Form SS-5, Application for a Social Security Card.  You can get this form at any Social Security office or by calling (800) 772-1213. Download the form from the Social Security Online Web site.

Obtaining an Individual Taxpayer Identification Number. The IRS will issue you an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN.  To apply for an ITIN , file Form W-7, Application for IRS Individual Taxpayer Identification Number. 

Estimated Taxes

Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. You generally have to make estimated tax payments if you expect to owe tax, including SE tax, of $1,000 or more when you file your return. There are two ways to pay as you go: withholding and estimated taxes.  If you are a self-employed individual and do not have income tax withheld, you must make estimated tax payments.

Who Must Pay Self-Employment Tax?

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

    Your net earnings from self-employment (excluding church employee income ) were $400 or more.

    You had church employee income of $108.28 or more.

Your net earnings from self-employment are based on your earnings subject to SE tax. Most earnings from self-employment are subject to SE tax.  Some earnings from employment (certain earnings that are not subject to social security and Medicare taxes) are subject to SE tax.

If you have earnings subject to SE tax, use Schedule SE to figure your net earnings form self-employment .  Before you figure your net earnings, you generally need to figure your total earnings subject to SE tax. 

Note:  The SE tax rules apply no matter how old you are and even if you are already receiving social Security or Medicare.

Are You Self-Employed?

You are self-employed if any of the following apply to you.

    • You carry on a trade or business as a sole proprietor or an independent contractor.
    • You are a member of a partnership that carries on a trade or business.
    • You are otherwise in business for yourself.

Trade or business. A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

Part-time business. You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.

Example. You are employed full time as an engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word-of-mouth. You are self-employed as the owner of a part-time repair shop.

Sole proprietor. You are a sole proprietor if you own an unincorporated business by yourself, in most cases. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. For more information on this election and the tax treatment of a foreign LLC, see Form 8832, Entity Classification Election.

Independent contractor. People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to SE tax.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to SE tax. However, your earnings as an employee may be subject to SE tax under other rules discussed in this section.

Sole Proprietorships
Provides a listing of tax forms a sole proprietor is to file and additional resources.

Social Security

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