Employment Taxes

Business Taxes

Employment Taxes

Both employers and self-employed individuals are responsible for paying federal, state and local taxes. If you have employees, you must withhold certain taxes from your employees pay checks. Employment taxes include income taxes, social security and Medicare taxes, and the federal unemployment tax (FUTA). If you are self-employed, you are responsible for paying a self-employment tax that is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

The following resources describe federal tax requirements for employers and the self-employed. For state tax requirements, including requirements for filing workers' compensation, disability and unemployment insurance taxes, consult the State Tax Guide.

For Self-Employed Individuals

• 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.

  For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors vs. Employees

  Earned Income Tax Credit

  If you file a Form 1040 Schedule C, you may be eligible to claim the Earned Income Tax Credit (EITC). Learn more about EITC, or use the EITC Assistant to find out if you are eligible.

• Self-Employed Individuals and Independent Contractors
  

• Who is Self-Employed?
  If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would file Schedule C or Schedule C-EZ with your Form 1040. Not sure if you are self-employed or an employee? Refer to Independent Contractors vs. Employees.

  Self-Employment Tax

  If you are self-employed you must pay 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.

  If you are self-employed you must pay Estimated Taxes
  This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you can be penalized for underpayment at the end of the tax year.

  Filing and Paying Your Taxes Electronically

  e-file for Business and Self-Employed Taxpayers

  EFTPS: The Electronic Federal Tax Payment System
  EFTPS is a tax payment system provided free by the U.S. Department of Treasury. Pay federal taxes electronically via the Internet or phone 24/7.

  Considering a Tax Professional

  Tips for Choosing a Tax Preparer

  Essential Forms and Publications

  Schedule C (PDF) and Instructions (PDF)
  Use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor.

  Schedule C - EZ (PDF)
  Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C.

  Publication 334 (2007), Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)

  Publications and Forms for the Self-Employed
  A collection of forms and publications related to understanding and fulfilling your filing requirements.

  Business and Employment Taxes - If you have Employees

  If you own a business you must pay Business Taxes
  Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation.

  As an employer you must withhold Employment Taxes from your employees' pay
  If you have employees, you are responsible for federal, state and local taxes. As an employer, you must withhold certain taxes from your employees' wages.

  Business Changes

  Business Structure Changes
  If you already have an Employer Identification Number (EIN), you may need to get a new one if either the organization or ownership of your business changes.

  Business Name Changes
  Explanation to Businesses on what actions are necessary to make a name change.

  Sale of a Business
  The buyer's consideration is the cost of the assets acquired. The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets.

  IRS Educational Materials and Assistance

  Small Business Tax Workshops are designed to help the small business owner understand and fulfill their Federal Tax responsibilities. Workshops are sponsored and presented by IRS partners who are Federal Tax specialists. The workshop is also available on a DVD .

  The Small Business Video and Audio Presentations page contains presentations designed to help new and existing small business owners understand and meet their federal tax obligations.

  Small Business Products Online Ordering
  Our free products, developed especially for the Small Business/Self-Employed person will help you meet your tax requirements.

  Taxpayer Advocate Service
  The Taxpayer Advocate, an independent organization within the IRS, helps taxpayers resolve problems with the IRS.

  If You Are A New Business

  Starting a Business
  If you are just starting your business please see our Starting a Business page for important information such as a checklist for starting a business, selecting a business structure, recordkeeping requirements, and selecting an accounting method.

  Operating a Business
  Learn about the various responsibilities associated with operating your own business.

  Recordkeeping
  Recordkeeping is a vital part of operating a business. See the Recordkeeping page for details.

  Retirement Plans

  Retirement Plans
  The advantages of a retirement plan are numerous. There are economic, business and tax advantages for your business, for your employees and for you. A retirement plan may give you an important competitive edge in attracting and keeping the best employees - and help you plan for your own retirement years. The retirement plans videos are also a great resource for choosing, operating and maintaining your retirement plan.

For Employers

• Employment Taxes for Businesses
  This IRS guide provides a description of federal taxes required for employers. Includes information on required forms (e.g. Form 941 and 944), filing requirements and deadlines, e-file options, and contact information for getting tax help.
• Withholding Compliance Questions and Answers
  Frequently asked questions about Form W-4.
• Independent Contractors vs. Employees : FAQs
  Are you or your help independent consultants or employees? Before you can learn how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services.
  
• Tax Withholding on Foreign Persons
  This section covers tax withholding topics for payments made to U.S. citizens abroad or aliens employed both in the United States and abroad. Also includes tax withholding and reporting rules on payments of U.S. source income made to foreign persons.
  
• Foreign Students and Scholars
  Aliens temporarily present in the United States as students, scholars, teachers, researchers, exchange visitors, and cultural exchange visitors are subject to special rules with respect to the taxation of their income.
  
• Reporting Agents (RAF)
  Reporting Agents assist employers in making required tax deposits and tax information filings to the federal government and to state and local governments.

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