How do you show proof of income for self-employment?

How do you show proof of income for self-employment?

It’s important for individuals with self-employment income to understand that, unlike with wage earnings issued by an employer, their income as an independent contractor, sole proprietor, part-time or full-time business owner, or small business owner doesn’t have automatic tax deductions taken from it.

First, you’ll need to know if you’re legally obligated to pay taxes on the income. Second, you’ll need to have a comprehensive way to accurately document income and expenses. Lastly, if applicable, you’ll need to know how you need to file your taxes.

Am I Subject to Self-Employment Tax and Income Tax?

Start by figuring your net profits and losses by subtracting business expenses from income. Any amount $400 or more in net earnings must be reported. The difference between expenses that do not surpass income is net profit, which is reported on Form 1040. Net loss occurs when your business’s expenses are greater than its income, and this loss can generally be deducted from gross income on Form 1040.

Also, keep in mind that self-employed individuals are likely required to file both annual returns and quarterly estimates on taxes. In most cases, self-employed individuals must pay both self-employment tax, which covers Medicare and Social Security taxes, as well as income tax, which covers earned income. Form 1040-ES, Estimated Taxes for Individuals is used to estimate Social Security and Medicare taxes.

Types of Self-Employment

There are various portals for self-employment, each operating a little differently when it comes to completing tax requirements for self-employment income. Let’s look:

1) Independent Contractor Self-Employment

The line between contractor and employee can often get blurry. The IRS has a criteria checklist to help you determine which category you fall under, such as by how much control you have over the performance of the work being completed. Furthermore, anyone performing over $600 of work for an entity as an independent contractor annually must be given a 1099-MISC form by the entity documenting that income. This serves as your proof of self-employment income and should be saved for tax preparation.

2) Small Business Self-Employment

Schedule C tax forms document your annual gross revenue in the monies you’ve received for products or services -and- your net profit after you’ve subtracted your expenses from your revenue. Keep in mind that you’ll need to prove income and expenses. You’ll find expense lines on the form to list items such as office supplies and materials, auto expenses, fixed-asset depreciation, payroll, and rent; this is partly proving, or rather justifying since you’re turning the form into the IRS. However, to verify the expenses, you’ll need to accurately keep documentation throughout the year, including balance sheets, receipts, and other accounting records.

3) Rent and Royalties Self-Employment

Royalties are sources of income for previous work completed but that still draw an income, such as income from a song or book you’ve written. Any entity that paid the royalties to you is required to send you the 1099-MISC form. Again, keep these forms for tax preparation. Rent is another form of income considered as self-employment. You’ll likely receive 1099 forms from commercial and residential tenants, but always keep your banking records as verification.

In closing, self-employment income can take many forms. It’s important to thoroughly document expenses and earnings throughout the year and know your employment classification and status. Documentation can be a DIY bookkeeping system of invoices, ledgers, and bank records, or it can be through an in-house or contracted professional accountant. Either way, an accurate system will be needed to properly file self-employment taxes and avoid devastating tax penalties for filing mishaps and inaccuracies.