Tuesday, May 25, 2010


During my “wanderings” on the web I came across a blog post that was providing answers to tax questions.

The question, submitted by a person who had recently begun doing some work as an “independent contractor”, was – “How much money do I have to make in order to be taxed?

The blog author provided the following answer –

Self-employed individuals are required to report any income earned over $400.00."

That answer is wrong!

As a self-employed individual you are taxed on your very first dollar of income! There is no minimum amount of self-employment income needed to be subject to the income tax. If your net income, after deducting all allowable legitimate business expenses, is $3.00 you must include this $3.00 in gross taxable income. If the net income is $398.00 you must add $398.00 to your gross income, same as you must do if the net income is $46,000.00.

The $400.00 figure refers to “self-employment tax” – the equivalent of FICA (Social Security and Medicare) Tax paid by those with net earnings from self-employment. If the net earnings from self-employment calculated on Schedule SE – which is 92.35% of the net profit reported on Schedule C or C-EZ (or passed through from a partnership on a K-1) – is less than $400.00 you do not have to pay any self-employment tax.

Let’s say Line 31 of your 2009 Schedule C, which is carried over to Line 12 on Page 1 of the Form 1040, is $430.00. Your net earnings from self-employment is $397.00 ($430.00 x .9235). Your Schedule C income is not subject to self-employment tax. If the Schedule C incomes is $500.00 your net earnings from self-employment is $462.00 ($500.00 x .9235). You will pay self-employment tax on the full $462.00.

The self-employment tax rate is 15.3%. Half of the self-employment tax calculated on Schedule SE is deducted “above the line” as an adjustment to income on Page 1 of Form 1040, reducing your Adjusted Gross Income.

I just wanted to set the record straight.