Tax Trails - Self-Employment Income
You are self-employed if you carry on a trade or business as a sole proprietor. Generally, you carry on a trade or business if your primary purpose is to earn a livelihood or to make a profit, and you are involved in the activity with continuity and regularity. 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 not have to carry on the activities full-time to be in a trade or business. Part-time work may be enough.
You are a sole proprietor if you own an unincorporated business by yourself. If you are the sole member of a domestic Limited Liability Company (LLC), you are a sole proprietor unless you elect to treat the LLC as a corporation. A sole proprietor must report income and expenses from their business on Schedule C (Form 1040) (PDF), Profit or Loss From Business. Schedule C-EZ (Form 1040) (PDF), Net Profit From Business, may sometimes be used instead of Schedule C (Form 1040). If you own more than one business as a sole proprietor, you must prepare a separate Schedule C for each business.
If you are a sole proprietor, you are generally liable for self-employment tax, which is figured on Schedule SE (Form 1040) (PDF), Self-Employment Tax.
If you earn or receive income during the year that is not subject to withholding or you do not have enough tax withheld, you may have to pay estimated tax. If you do not pay enough tax during the year through withholding or by making estimated tax payments, you may have to pay a penalty.
For more information about sole proprietorships, refer to Publication 334, Tax Guide for Small Business. For more information on estimated tax, refer to Chapter 2 of Publication 505, Tax Withholding and Estimated Tax.