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U.S. Self Employment Income
by L. Kenway BComm CPB Retired
Self employment income means you need to become familiar with IRS tax compliance requirements ... to avoid getting into deep dodo.
Sole proprietors must pay self-employment tax on their net earnings. Here is basic information you need to get you started on the right foot.
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Highlights Of This Post
Self Employment Income and Taxes✔︎ Standard Mileage Rates - 2011 to 2024
✔︎ U.S. Rules for Business Use of Your Car
✔︎ Overnight Business Trip Per Diem Meal Allowances
✔︎ Entertainment - What's Deductible, What's Not
✔︎ Estimated Tax Payments for Self-Employed (Form 1040-ES)
✔︎ Self Employment Tax (Form 1040 Schedule SE and FICA)
✔︎ The Doctrine of Constructive Receipt ... YOU need to be aware of how the courts view postdated or predated cheques
✔︎ Employment Identification Number vs Social Insurance Number
✔︎ What Business Entity is Best For You
✔︎ Simplified Home Office Deduction
✔︎ 2018 Tax Reform - New Small Business Income Deduction
 Chat 1 Small Business Deadlines Interest Rates and More |
This Chat Self Employment Income Standard Mileage Rates |
 Chat 3 Independent Contractors |
Information About Your Self Employment Income You Need To Know
The Doctrine of Constructive Receipt
Are You Permitted to Receive / Write Postdated or Predated Cheques?
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When accounting for self employment income, it is important to understand the constructive receipt principle. Under the doctrine of constructive receipts, cash basis taxpayers (as opposed to accrual basis taxpayers) are not permitted to receive/write postdated or predated cheques. The doctrine of constructive receipts is defined in the regulations but was conceived by the courts to test realization of income. It prevents a cash basis taxpayer from selecting the year in which income will be reported. Its purpose is to prevent tax avoidance. |
For tax purposes, a cheque is constructively received when it is delivered to the taxpayer ... not when it is cashed.
Source: Barriers to the application of the constructive receipt doctrine by Knight, Lee, G, Knight, Ray A. published in Tax Executive on January 1, 1989
The Bookkeeper's Tip
A Good Bookkeeping Practice
Employment Identification Number
Earning self employment income means that come January each year, you will begin receiving your 1099MISC forms in the mail or by eMail. With identity theft on the rise, here is something you should put on your to-do list.
This tip comes from TaxReceipts.com. A great site to visit. They talk tax in plain English.
"Consider obtaining an Employer Identification Number from the IRS for your business, even if you are a sole proprietor. The last thing you want is to send your Social Security Number to every company that you do work for and to have your SSN plastered across the front of every 1099-MISC form that is sent to you in January."
Good To Know
Which Business Entity Is Best For You?
Sole Proprietors' self employment income (net earnings) are subject to self employment tax and must make quarterly estimated tax payments. You are NOT an employee which means you take a draw. Incorporating doesn't make sense for everyone, especially if the corporation will be under capitalized.
S-Corp distributions to shareholders (not to be confused with payroll earnings) are NOT subject to self employment tax. However all owners must be on the payroll and receive a reasonable amount of compensation which is subject to payroll taxes. It should be your main source of income. You are only allowed to take losses up to your basis. Negative basis is treated is a non-deductible loss.
The IRS audits this corporate structure to ensure working shareholders are not trying to minimize payroll tax by paying too low a salary.
Want to get audited? Don't pay yourself any compensation!
C-Corp shareholders must be a working employee to receive compensation that is restricted to a reasonable amount. The corporation pays half of the payroll taxes. Double taxation may occur if dividends are issued.
Reasonable amount is defined as an amount you would pay an arm's length person for doing the same job.
Estimated Tax Payments On Your Self Employment Income
Due Dates For 2024
This is the method used to pay income taxes on income not subject to withholding taxes ... i.e. your self employment income.
You need to pay estimated taxes four times if your expected tax is $1,000 or more in 2023 after subtracting withholdings and credits ... AND you expect your withholding and refundable credits to be less than the smaller of:
- 90% of your taxes to be shown on your 2024 return ... OR
- 100% of your taxes to be shown on your 2023 return which must cover 12 months.
You may be charged a penalty if you don't pay enough tax by each due date. If you like smoothing out your cash flow over the year, you can setup monthly payments on EFTPS instead of the four required payments.
IRS Form 1040-ES is a worksheet that can help you calculate your estimated payment.
| Tax Type | Tax Period | Form to be Filed | Filing AND Payment Deadline |
|---|---|---|---|
| 1st Tax Installment (3 months) | Jan-Mar | 1040-ES pay thru EFTPS | April 15 |
| 2nd Tax Installment (2 months) | Apr-May | 1040-ES pay thru EFTPS | June 15 |
| 3rd Tax Installment (3 months) | Jun-Aug | 1040-ES pay thru EFTPS | September 15 |
| 4th Tax Installment (4 months) | Sep-Dec | 1040-ES pay thru EFTPS | January 15 next year* |
| Annual Est. Payment Farmers, Fishermen | Jan-Dec | 1040-ES | January 15 next year |
If the 15th falls on a Saturday or Sunday, the filing date and payment move to the Monday.
*You don't need to pay the January 15 estimated tax payment if you file your 2023 tax return
with taxes due by January 31, 2024. However, if you do need to make a
payment, best practice is review your estimated earnings and payments
made to date. Adjust your fourth payment to ensure you aren't
under paying or over paying your tax. IF you choose to write a cheque rather pay online through EFTPS ... although why you would choose this payment method is beyond me ... the cheque is made payable to United States Treasury.
BOOKKEEPER'S HANDY
REFERENCE
Barbara Weltman, attorney and author, wrote an excellent article for SBA.gov titled "5 Traps in Paying Estimated Taxes" (no longer available).
The article discussed these five traps:
- Failing to have cash on hand.
- Not covering all tax obligations.
- Believing each quarterly payment falls evenly.
- Paying too much, too early.
- Reporting the payment under the SSN of the wrong spouse.
See the IRS Estimated Taxes Guide for more small business information on estimated taxes located on their website by entering "Estimated Taxes" into the search box. It is a lot easier than trying to find things on the redesigned site ... you sometimes have to go 4 to 6 levels deep to get what you want now!
For example take a look at following links to Estimated Taxes: IRS> File> Business and Self Employed (on left hand side navigation bar)> Small business and Self-employed> Self-Employed > How Do I Make My Quarterly Payments?> find the inline text link for "Estimated Taxes" in the last paragraph.
You used to get there in three clicks ... Businesses> Self-Employed> If you are self-employed you must pay Estimated Taxes. Now it is seven clicks!
There is also a good small business tax information article on Estimated Tax 101 at https://fairmark.com/general-taxation/estimated-tax/estimated-tax-101/. It walks you through the process and explains how to decide what is the best way for you to calculate your estimated taxes.
Self Employment Tax / FICA
Self employment income is subject to FICA/SICA. What is the FICA tax rate for a self employed individual?
Well this is embarrassing! "Someone" (that would be me!) moved the data to a whole new page all it's own.
As you need to know this stuff, you'll find FICA rates for your self employment income here.
2024 Standard Mileage Rates
Source: Notice IR-2023-239, IR-2022-234, IR 2021-251, IR 2020-279, IR 2019-215
Normally released sometime in December each year; updated January 4, 2023
December 14, 2023 --- The 2024 standard mileage rates were increased. 2025 mileage rates are expected to be released in December, 2024.
June 9, 2022 --- In a rare event, the 2022 standard mileage rates were changed midyear to help alleviate the burden of rising costs. 2023 mileage rates are expected to be released in December, 2022.
December 20, 2021 --- The 2022 standard milage rates were released on December 17, 2021.
Earning self employment income often requires business travel. Here are the mileage rates allowed by IRS.
Table below is cents / mile
| Year | Business Miles Driven*** | Moving / Relocation Purposes | Medical Purposes | Charitable Services |
|---|---|---|---|---|
| 2024 | 67.0* | 21.0** | 21.0 | 14.0 |
| 2023 | 65.5* | 22.0** | 22.0 | 14.0 |
| 2022 Jul-Dec | 62.5* | 22.0** | 22.0 | 14.0 |
| 2022 Jan-Jun | 58.5* | 18.0** | 18.0 | 14.0 |
| 2021 | 56.0* | 16.0** | 16.0 | 14.0 |
| 2020 | 57.5* | 17.0** | 17.0 | 14.0 |
| 2019 | 58.0* | 20.0** | 20.0 | 14.0 |
| 2018 | 54.5* | 18.0** | 18.0 | 14.0 |
| 2017 | 53.5 | 17.0 | 17.0 | 14.0 |
| 2016 | 54.0 | 19.0 | 19.0 | 14.0 |
| 2015 | 57.5 | 23.0 | 23.0 | 14.0 |
| 2014 | 56.0 | 23.5 | 23.5 | 14.0 |
| 2013 | 56.5 | 24.0 | 24.0 | 14.0 |
| 2012 | 55.5 | 23.0 | 23.0 | 14.0 |
| 2011 Jul-Dec | 55.5 | 23.5 | 23.5 | 14.0 |
| 2011 Jan-Jun | 51.0 | 19.0 | 19.0 | 14.0 |
*Tax Cuts and Job Act (TCJA) suspended the misc. itemized deduction from 2018 -2025; exceptions were made to members of a reserve component of US armed forces, state or local government officials paid on a fee basis and certain performing artists. See Notice 2018-42 for more information which modifies Notice 2018-03 and Notice 2019-2.
**TCJA repealed moving expense deduction for individual taxpayers from 2018-2025 except for US armed forces on active duty. See Notice and 2019-2 and Notice 2018-42 for more information which modifies Notice 2018-03.
The Bookkeeper's Tip
Deemed Depreciation
AIPB's newsletter dated February 24, 2014 explains "a portion of the standard mileage deduction must be used to reduce a vehicle’s basis", also known as deemed depreciation, as follows:
30¢/mi.for 2024
28¢/mi.for 2023
26¢/mi.for 2021 & 2022 [Notice 2022-03]
27¢/mi.for 2020
26¢/mi.for 2019
25¢/mi.for 2017 & 2018
24¢/mi.for 2016
24¢/mi.for 2015, 22¢/mi.for 2014
23¢/mi. for 2013
23¢/mi. for 2012
22¢/mi. for 2011
23¢/mi. for 2010.
***You cannot use the business standard mileage rate :
- for any vehicle used for hire or for more than four vehicles used simultaneously;
- for a vehicle after claiming a Section 179 deduction for that vehicle; or
- after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS).
Vehicle means any car, van, pickup or panel truck. You always have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.
You do need a mileage log to support the number of miles your vehicle was driven for business purposes.
While you can't deduct actual vehicle operating costs (fixed and variable) under this method, you are allowed to deduct parking and toll expenses related to business, the business portion of interest paid on vehicle loans, and the business portion of any local or state personal property tax paid on the vehicle. (See IRS Revenue Procedure 2010-51 Section 4.03.)
Historical mileage rates can be found of on the IRS website at irs.gov> Tax Professionals> Standard Mileage Rates . If the page can't be found when you key it into your browser, do a search on the IRS website for "standard mileage rates". Choose the article titled Standard Mileage Rates ... following table summarizes ...
The standard mileage rates are based on an annual study by independent contractor Runzheimer International. The study based the business rate on the fixed and variable costs of operating a vehicle while medical and moving are based on the variable costs.
Additional small business tax information on using the standard mileage rate can be found in IRS Publication 463 Travel, Entertainment, Gift, and Car Expenses.
Entertainment - What's Deductible, What's Not
What's deductible? What's not?Part of earning self employment income necessitates entertaining potential and existing customers and clients. Section 274 of the tax code deals with the disallowance of certain entertainment, amusement or recreation expenses.
If you have a business meal at a club facility:
- You CANNOT deduct any facility fees or dues.
- You must establish that the activity was associated and conducted for purposes relating to your business. The business discussion could occur directly before or after the activity.
- The business expense must be ordinary, necessary, and paid or incurred during the tax year to produce or collect income.
This section generally includes expenses relating to meals, travel and vehicle. Visit law.cornell.edu> US code> Title 26> Subtitle A> Chapter 1> Subchapter B> Part IX> Section 274 and Part VII> Section 212 for more details.
Section 162 states you must PROVE the expense is ordinary AND necessary to doing your business. You also have to provide proof the business expense has been paid.
No one said earning self employment income would be easy. This is a frequently audited area so know the rules.
If you made it this far, I think you've earned a nice, hot cup of tea. :o)
See you on the next page ...
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Bookkeeping Essentials › IRS Tax Compliance › Self-Employment Income