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.
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.
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 person paying for the work
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 Pub. 15-A, Employer's Supplemental Tax Guide.
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.
Business owned and operated by spouses.
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 Pub. 541, Partnerships.
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 Ventures
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:
|Fishermen (Capital Construction Fund)
||Instructions for Form 1120S
|Starting a business
|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?
in chapter 1.
|Do I have to start my tax year in January, or can I start it in any other month?
in chapter 2.
|What method can I use to account for my income and expenses?
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?
in chapter 8.
|What kinds of expenses are not deductible as business expenses?
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.
Provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and
enforce the 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 send us comments from www.irs.gov/formspubs
. Click on “More Information
” and then on “Give us feedback.
Or you can write to:
Internal Revenue Service
Tax Forms and Publications
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.
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.
to download forms and publications. Otherwise, you can go to www.irs.gov/orderforms
to order current and prior-year forms and instructions. Your order should arrive within 10 business days.
If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help
at the end of this publication.
The following are some of the tax changes for 2015.
Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $118,500
for 2015. There is no maximum limit on earnings subject to the Medicare part.
Standard mileage rate. For 2015, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business
use is 57.5 cents per mile. For more information, see
Car and Truck Expenses
in chapter 8.
The following are some of the tax changes for 2016. For information on other changes, go to IRS.gov.
Standard mileage rate. For 2016, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business
use is 54 cents per mile.
Self-employment tax. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $118,500 for 2016.
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
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:
Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS,
Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum fee,
Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits,
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
Transactions the same or substantially similar to one of the types of transactions the IRS has identified as a transaction
For more information, see the Instructions for Form 8886.
Simplified method for business use of home deduction. . The IRS provides a simplified method to determine your expenses for business use of your home. For more information, see
Business Use of Your Home
in chapter 8.