Publication 334 - Introductory Material

Table of Contents

Introduction

The purpose of this publication is to provide general information about the federal tax laws that apply to small business owners who are sole proprietors and to statutory employees. This publication has information on business income, expenses, and tax credits that may help you file your income tax return.

Are you self-employed?   You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor.

Sole proprietor.   A sole proprietor is someone who owns an unincorporated business by himself or herself. 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.

Trade or business.    A trade or business is generally an activity carried on to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. 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 to make ongoing efforts to further the interests of your 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 may be self-employment.

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 they 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 to direct only the result of the work and not how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax. For more information on determining whether you are an employee or independent contractor, see Publication 15-A, Employer's Supplemental Tax Guide.

Statutory employee.   A statutory employee has a checkmark in box 13 of his or her Form W-2, Wage and Tax Statement. Statutory employees use Schedule C or C-EZ to report their wages and expenses.

Limited liability company (LLC).   A limited liability company (LLC) is an entity formed under state law by filing articles of organization. Generally, a single-member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return. An owner who is an individual may use Schedule C or C-EZ.

Husband and wife business.   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C or C-EZ. Instead, file Form 1065, U.S. Return of Partnership Income. For more information, see Publication 541, Partnerships.

   Exception—Community income. If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business either as a sole proprietorship or a partnership. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity.

   Exception—Qualified joint venture. If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. For an explanation of "material participation," see the Instructions for Schedule C, line G.

  To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. For more information, see Qualified Joint Venture in the Instructions for Schedule SE.

This publication does not cover the topics listed in the following table.   
IF you need information about: THEN you should see:
Corporations Publication 542
Farming Publication 225
Fishermen (Capital Construction Fund)  
Publication 595
Partnerships Publication 541
Passive activities Publication 925
Recordkeeping Publication 583
Rental Publication 527
S corporations Instructions for Form 1120S

What you need to know.   Table A provides a list of questions you need to answer to help you meet your federal tax obligations. After each question is the location in this publication where you will find the related discussion.

Table A. What You Need To Know About Federal Taxes

(Note. The following is a list of questions you may need to answer so you can fill out your federal income tax return. Chapters are given to help you find the related discussion in this publication.)

What must I know   Where to find the answer
 
What kinds of federal taxes do I have to pay? How do I pay them?   See chapter 1.
What forms must I file?   See chapter 1.
What must I do if I have employees?   See Employment Taxes in chapter 1.
Do I have to start my tax year in January, or can I start it in any other month?   See Accounting Periods in chapter 2.
What method can I use to account for my income and expenses?   See Accounting Methods in chapter 2.
What kinds of business income do I have to report on my tax return?   See chapter 5.
What kinds of business expenses can I deduct on my tax return?   See Business Expenses in chapter 8.
What kinds of expenses are not deductible as business expenses?   See Expenses You Cannot Deduct in chapter 8.
What happens if I have a business loss? Can I deduct it?   See chapter 9.
What must I do if I disposed of business property during the year?   See chapter 3.
What are my rights as a taxpayer?   See chapter 11.
Where do I go if I need help with federal tax matters?   See chapter 12.

IRS mission.   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

  You can write to us at the following address:

 
Internal Revenue Service 
Business Forms and Publications Branch 
SE:W:CAR:MP:T:B 
1111 Constitution Ave. NW, IR-6526 
Washington, DC 20224

  We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

  You can email us at taxforms@irs.gov. Please put “Publications Comment” on the subject line. You can also send us comments from www.irs.gov/formspubs, select “Comment on Tax Forms and Publications” under “More Information.”

  Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Ordering forms and publications.   Visit  
www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

 
Internal Revenue Service 
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Bloomington, IL 61705-6613

Tax questions.   If you have a tax question, check the information available on IRS.gov or call 1-800-TAX-FORM (1-800-829-1040). We cannot answer tax questions sent to either of the above addresses.

Future Developments

For the latest information about developments related to Publication 334, such as legislation enacted after it was published, go to www.irs.gov/pub334.

What's New for 2012

The following are some of the tax changes for 2012. For information on other changes, go to IRS.gov.

Tax rates. . For tax years beginning in 2012, the social security part of the self-employment tax remains at 10.4%. The Medicare part of the tax remains at 2.9%. As a result, the self-employment tax is 13.3%.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $110,100 for 2012. There is no maximum limit on earnings subject to the Medicare part.

Standard mileage rate. For 2012, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 55.5 cents per mile. For more information, see Car and Truck Expenses in chapter 8.

What's New for 2013

The following are some of the tax changes for 2013. For information on other changes, go to IRS.gov.

Standard mileage rate. For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56.5 cents per mile.

Self-employment tax. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $113,700 for 2013.

Reminders

Accounting methods. Certain small business taxpayers may be eligible to adopt or change to the cash method of accounting and may not be required to account for inventories. For more information, see Inventories in chapter 2.

Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. Reportable transactions include:

  1. Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS,

  2. Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum fee,

  3. Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits,

  4. Transactions that result in losses of at least $2 million in any single tax year ($50,000 if from certain foreign currency transactions) or $4 million in any combination of tax years, and

  5. Transactions the same or substantially similar to one of the types of transactions the IRS has identified as a transaction of interest.

For more information, see the Instructions for Form 8886.

Photographs of Missing Children

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

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