Small business, self-employed, other business

You'll need to:

• Secure a completed Form W-4, Employee's Withholding Certificate from each employee to know how much federal income tax to withhold from your employee's wages.
• Use Publication 15 (Circular E), Employer's Tax Guide, Publication 15-A, Employer's Supplemental Tax Guide, and Publication 15-T, Federal Income Tax Withholding Methods to determine the amount of withholding and the directions on depositing the withheld amounts and other employment taxes.  Also, refer to Form 941 Employer's QUARTERLY Federal Tax Return and the Instructions for Form 941; or Form 944, Employer's ANNUAL Federal Tax Return and the Instructions for Form 944; or Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return and the Instructions for Form 940.

Generally, employers are required to file Forms 941 quarterly. However, some small employers (those whose annual liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less for the year) may file Form 944 annually instead of Forms 941. See the Instructions for Form 944 for more information. Employers are generally required to also file Form 940 annually. See Topic 759 for more information about Form 940. Employers must also file with the Social Security Administration a Form W-2, Wage and Tax Statement annually for each employee along with a Form W-3, Transmittal of Wage and Tax Statements, and furnish a copy of the Form W-2 to each employee. See the General Instructions for Forms W-2 and W-3 PDF.

Monthly or semiweekly deposits may be required for taxes reported on Form 941 (or Form 944), and quarterly deposits may be required for taxes reported on Form 940. Employers must deposit all employment taxes electronically by electronic funds transfer (EFT). Employers should consult each form’s instructions or Publication 15, Section 11, Depositing Taxes and Section 14, Federal Unemployment (FUTA) Tax to determine when and how to make deposits.

The Modernized e-file (MeF) for employment taxes and E-file employment tax forms pages offer ways to file Forms 940, 941, and 944 electronically. See also Become an authorized e-file provider. Prospective participants must first complete and submit an IRS e-file application. You can complete the IRS e-file application online after registering for e-services.

• Small business and self-employed tax center

Although these forms are called information returns, they serve different functions.

Employers use Form W-2, Wage and Tax Statement to:

• Report wages, tips, or other compensation paid to an employee.
• Report the employee's income, Social Security, and Medicare taxes withheld and other information.

Employers furnish the Form W-2 to the employee and the Social Security Administration (SSA). The SSA shares the information with the Internal Revenue Service.

Payers use Form 1099-MISC, Miscellaneous Information and/or Form 1099-NEC, Nonemployee Compensation to:

• Report any amount of federal income tax withheld under the backup withholding rules (Form 1099-MISC or Form 1099-NEC).
• Report payments of $10 or more made in the course of a business in royalties or broker payments in lieu of dividends or tax-exempt interest (Form 1099-MISC).
• Report payments of $600 or more made in the course of a business in rents, prizes and awards, other income and for other specified purposes, including gross proceeds paid to an attorney (Form 1099-MISC).
• Report payments of at least $600 in the course of a business to a person who's not an employee for services, including payments to an attorney (Form 1099-NEC).
• Report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale (Form 1099-MISC or Form 1099-NEC).

Payers file Forms 1099-MISC and 1099-NEC with the IRS and provide them to the person or business that received the payment.

• Tax Topic 752 - Filing Forms W-2 and W-3
• General Instructions for Forms W-2 and W-3
• General Instructions for Certain Information Returns
• Instructions for Forms 1099-MISC and 1099-NEC, Miscellaneous Information and Nonemployee Compensation
• E-file information returns with IRIS
• Filing Information Returns Electronically (FIRE)

The determination can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It's not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker's classification:

• Behavioral control (whether there's a right to direct or control how the worker does the work),
• Financial control (whether there's a right to direct or control the business part of the work), and
• Relationship of the parties (how the business and worker perceive the relationship).

For more information on employer-employee relationships, refer to Publication 15 (Circular E), Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide. Also, refer to Publication 1779, Independent Contractor or Employee PDF and Publication 5520, How Businesses Determine if a Worker is an Employee or Independent Contractor PDF.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Generally, if you're an independent contractor you're considered self-employed and should report your income (nonemployee compensation) on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). Most self-employed individuals will need to pay self-employment tax (comprised of Social Security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. Use Schedule SE (Form 1040), Self-Employment Tax to figure the tax due.

Generally, there's no tax withholding on income you receive as a self-employed individual as long as you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you are required to but do not make timely estimated tax payments, the IRS may assess a penalty for an underpayment of estimated tax. For more information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax. Unlike independent contractors, employees generally pay income tax and their share of Social Security and Medicare taxes through payroll deductions (withholding).

• E-file information returns with IRIS
• Tax Topic 407 - Business income
• Tax Topic 762 - Independent contractor vs. employee
• Independent contractor (self-employed) or employee?

You file a federal income tax return annually, but the federal income tax system is a pay-as-you-go system. There are two methods for paying-as-you-go: withholding and estimated tax. Refer to Publication 505, Tax Withholding and Estimated Tax.

If your business is a sole proprietorship or an unincorporated single-member LLC with you as the sole owner, the income is attributable to you and must be reported on your individual income tax return. If your business is a partnership, an unincorporated multi-member LLC, or an S corporation, the ordinary business income passes through to the partners, members or shareholder(s) and is attributable to them and must be reported on their personal income tax returns.

If you owe more tax at the end of the year after taking into account any withholding on other income, deductions, and credits, you may have to pay an underpayment penalty. You should make quarterly estimated tax payments and/or increase the withholding on other income subject to withholding.

Form 1040-ES, Estimated Tax for Individuals includes instructions to assist you in determining if you need to make estimated tax payments, provides their due dates and explains how to pay them. You can also use our online tool, Am I required to make estimated tax payments?

When you file your individual income tax return each year:

• Include the income from the business on your Form 1040, U.S. Individual Income Tax Return and the appropriate schedule(s): Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship); Schedule E (Form 1040), Supplemental Income and Loss; and/or Schedule SE (Form 1040), Self-Employment Tax.
• If you made estimated tax payments during the year, report them on your individual income tax return as a payment.

Generally, all other corporations must make installment payments if they expect their estimated tax for the year to be $500 or more.

Entities which do not pay estimated tax installments when they are due may be subject to an underpayment penalty (estimated tax penalty). For more information, see the related instructions for the income tax form filed.

• Publication 542, Corporations
• Publication 583, Starting a Business and Keeping Records
• Publication 541, Partnerships
• Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)
• Small business and self-employed tax center

If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

• You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
  • If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
  • Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.
  • For purposes of the $25 per person limit, don't consider gifts costing $4 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.
• Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
• You need to have timely kept records that prove the business purpose of the gift as well as the details of the amount spent and date of the gift.

• Publication 463, Travel, Entertainment, Gift, and Car Expenses

To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.

You must use part of your home:

• Exclusively on a regular basis as your principal place of business,
• Exclusively on a regular basis as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
• In the case of a separate structure which isn't attached to your home, exclusively on a regular basis in connection with your trade or business
• On a regular basis for storage of inventory or product samples for use in your trade or business of selling products if your home is the only fixed location of the trade or business,
• For rental use, or
• As a daycare facility.

Note: You don't have to meet the exclusive use test if you satisfy the rules that apply to storage, rental, or daycare use.

The simplified method is available to qualifying taxpayers. They can claim a prescribed rate of $5 per square foot (up to a maximum of 300 square feet) directly on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), by entering the square footage of the home and square footage of the office in the applicable boxes to indicate their election to use the simplified method. For more information, see Simplified option for home office deduction and FAQs – Simplified method for home office deduction.

Note: You may not use the simplified method for rental use of your home.

Taxpayers who don't choose the simplified method, will continue to use Form 8829, Expenses for Business Use of Your Home to compute the expense allowable as a deduction on Schedule C (Form 1040).

If you use your home in your farming business, report your expenses on Schedule F (Form 1040). Partners report their unreimbursed partnership expenses on Schedule E (Form 1040). If you are a statutory employee (box 13 of Form W-2 checked), report your expenses using the same rules as self-employed persons on Schedule C (Form 1040).

• Publication 587, Business Use of Your Home
• Instructions for Form 8829

Your nanny is considered your household employee and you're her household employer:

• As a household employer, you only withhold and pay Social Security and Medicare taxes if the cash wages you paid her exceed the threshold amount for the year. See Publication 926, Household Employer's Tax Guide.
• If the amount paid is less than the threshold, you don't owe Social Security or Medicare taxes.
• If the amount paid is more than the threshold, you must withhold your employee's share of Social Security and Medicare taxes unless you choose to pay both her share and your share. The combined taxes are 15.3% of cash wages. Your share is 7.65% and her share is 7.65%.
• If you decide to pay the employee's share of Social Security and Medicare taxes (instead of withholding from the employee’s wages), the amount you pay must be included in the employee's wages for income tax purposes. For information on how to report the taxes you paid on behalf of your employee, see Publication 926, Household Employer's Tax Guide, under the title “Not withholding the employee's share.” 
• If you pay your employee in excess of $200,000 in a calendar year, you must also withhold a 0.9% Additional Medicare Tax from the wages. You’re required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to your employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee.
• You may also be responsible for paying federal unemployment tax. Federal unemployment tax isn't withheld from employees' wages.
• You're not required to withhold income tax from a household employees' wages. However, you and your nanny may agree for you to withhold income tax from her wages. In order to withhold income tax, have the nanny complete a Form W-4, Employee's Withholding Certificate.
• If you must pay Social Security and Medicare taxes or federal unemployment taxes, or if you withhold income tax, you'll need to file Schedule H (Form 1040), Household Employment Taxes. You'll also need to file a Form W-2, Wage and Tax Statement and furnish a copy of the form to your nanny and the Social Security Administration.
• If you're paying your household employment taxes using Schedule H, to avoid an estimated tax penalty based on your household employment taxes, you can:
  • Ask your employer to withhold more federal income tax from your wages;
  • Ask the payer of your pension or annuity to withhold more federal income tax from your benefits, or;
  • Make estimated tax payments to the IRS or increase the payments if you already make estimated tax payments.
• If you're a household employer with a business that has employees, you may pay your household employment taxes with your business or farm employment taxes, and you must include your household employment taxes with the other employment taxes that you file on Form 941, Employer's QUARTERLY Federal Tax Return, Form 944, Employer's ANNUAL Federal Tax Return or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees; and also on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

• Tax Topic 756 - Employment taxes for household employees
• Small business and self-employed tax center

• A sole proprietor without employees who isn’t required to file any excise tax return and hasn’t established a pension, profit-sharing, or retirement plan doesn't need an EIN (but can get one). In this instance, the sole proprietor uses his or her Social Security number (instead of an EIN) as the taxpayer identification number. However, if at any time the sole proprietor hires an employee, needs to file an employment or excise tax return, or is establishing a pension, profit-sharing, or retirement plan, then the sole proprietor will need an EIN for the business and can't use his or her social security number.
• If you have an existing EIN as a sole proprietor and become a sole owner of a Limited Liability Company (LLC) that has employees, needs to file an employment or excise tax return, or is establishing a pension, profit sharing, or retirement plan, you need to get a separate EIN for the LLC.

• Publication 1635, Employer Identification Number - Understanding Your EIN
• Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)
• Form SS-4, Application for Employer Identification Number (PDF)
• Small business and self-employed tax center

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
• Whether you have personal motives in carrying on the activity.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations.

Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a married couple is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.

A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture:

• The only members in the joint venture are a married couple who file a joint tax return,
• The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),
• Both spouses materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and
• Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 or Form 1040-SR a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040), Profit or Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax to pay self-employment tax.

For more information about the qualified joint venture rules, see Election for married couples unincorporated businesses.

Married couple businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For Special Rules for Spouses in Community States, see Revenue Procedure 2002-69 PDF and the Instructions for Schedule C.

• Publication 334, Tax Guide for Small Business
• Publication 925, Passive Activity and At-Risk Rules
• Publication 541, Partnerships