I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?
Your self-employment income is reported on Form 1040, SCHEDULE C, Profit or Loss from Business, or on Form 1040, SCHEDULE C-EZ, Net Profit from Business.
Your Medicare and social security taxes are reported on Form 1040, SCHEDULE SE, Self-Employment Tax
As a self-employed person, you pay your Medicare and social security taxes the same way you pay your income taxes. If you expect to owe less than $1,000 in income and self-employment taxes, you can pay them when you file your income tax return. If you expect to owe $1,000 or more in income and self-employment taxes, you will need to make estimated tax payments. These payments are made quarterly using Form 1040-ES, Estimated Tax for Individuals. You will need to figure these taxes at the beginning of the year. To learn about figuring and making estimated tax payments, please refer to Publication 505, Tax Withholding and Estimated Tax.
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I am a sole proprietor. Can I use Schedule C-EZ instead of Schedule C?
You can use Form 1040, SCHEDULE C-EZ to determine your net profit if you have only one sole proprietorship and you meet all of the following requirements; your business expenses were not more than $2,500, and you did not have a net loss from your business, you use the cash method of accounting, and you did not have an inventory during the year. There are other requirements. Refer to page 1 of Schedule C-EZ to see if you qualify. Additional information is also available in Tax Topic 408, Sole Proprietorship.
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I buy and sell stocks as a day trader using an online brokerage firm. Can I treat this as a business and report my gains and losses on Schedule C?
A business is generally an activity carried on for a livelihood or in good faith to make a profit. Rather than defined in the tax code, exactly what activities are considered business activities has long been the subject of court cases. The facts and circumstances of each case determine whether or not an activity is a trade or business. Basically, if your day trading activity goal is to profit from short-term swings in the market rather than from long-term capital appreciation of assets, if your income is primarily from the sale of securities rather than from dividends and interest paid on securities, and if you expect this income to be your primary income for meeting your personal living expenses, i.e. you do not have another regular job, then your trading activity might be a business.
For details about not-for-profit activities, refer to chapter 1 in Publication 535, Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.
If your trading activity is a business, your trading expenses would be reported on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, SCHEDULE A, Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, SCHEDULE D, Capital Gains and Losses, unless you file an election to change you method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses and your trading expenses on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship).
A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17.
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If you have run a small business in the past, but this year there is no income or expenses, is it necessary to file a Schedule C?
If your sole proprietorship business is inactive during the full year, it is not necessary to file a Form 1040, SCHEDULE C, Profit or Loss from Business, for that year.
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