If your self-employment income is less than $5,000 for the year, you still have to report it on your federal taxes. The tax treatment of employment and self-employment income is the same, but the way in which you calculate your taxable income and the forms you'll use are different. Two tax forms that self-employed people typically file are Schedule SE and Schedule C or C-EZ.
Schedule C for Business Profits and Losses
Regardless of whether the income relates to a small business you run or to payments you receive for doing some contract work, it must be reported as self-employment income on a Schedule C attachment to your federal taxes. One advantage to earning self-employment income is that you can deduct all the ordinary and necessary expenses you incur while earning that income. You report these expenses on Schedule C on the appropriate line that best describes the type of expense, such as office rent, insurance, tools and supplies and travel. The sum of these expenses reduce the self-employment income reported on Schedule C to arrive at your taxable net profit or loss that ultimately is reported on your tax return.
Saving Time With Schedule C-EZ
Because your self-employment income for the year is under $5,000, you might be eligible to use the shorter Schedule C-EZ instead of Schedule C. Schedule C-EZ allows you to report business expenses in the aggregate as a single figure, which may save you time when preparing your return. As long as you're not reporting more than $5,000 in business expenses, don't have employees, have only one line of business that doesn't involve inventory and aren't reporting a net loss or a deduction for the business use of your home, you can use Schedule C-EZ.
Self-Employment Taxes and Schedule SE
If you calculated a net profit of $400 or more on your Schedule C or C-EZ, you'll also need to prepare a Schedule SE form to figure out how much you owe in self-employment tax on your self-employment income. Your self-employment tax bill consists of a 12.4-percent Social Security tax and a 2.9-percent Medicare tax. The Social Security tax is imposed on a maximum amount of total income -- a threshold amount that increases slightly each year. If you also have a job and your employer withholds taxes from your salary, you won't owe additional Social Security tax on the self-employment income if your annual wages are already at or above the income threshold. The Medicare tax, however, doesn't have a similar income threshold, meaning the tax is charged on an unlimited amount of income. Depending on your answers to a number of questions at the top of the Schedule SE form, you may be able to save more time by preparing the short Schedule SE instead of the long one.
Form 1040 Is Required
The Internal Revenue Service publishes different, and shorter, variations of the 1040 form, such as the 1040EZ and 1040A. When reporting self-employment income on Schedules SE and C or C-EZ, however, these abbreviated 1040 forms are no longer available to you, as the 1040 is required. A benefit of having to file Form 1040 is that you can deduct half of the self-employment taxes you owe on Schedule SE as an adjustment to income.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.