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Publication
334
Tax Guide for
Catalog Number 11063P
Small Business
Department
of the
For use in
Treasury
preparing
Internal
(For Individuals Who Use
Revenue
Service
Schedule C or C-EZ)
2009
Returns
Get forms and other information faster and easier by:
Internet www.irs.gov
www.irs.gov/efile
Jan 19, 2010

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in addition to your regular job or business may be
self-employment.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Independent contractor. People such as doctors, den-
tists, veterinarians, lawyers, accountants, contractors,
What’s New for 2009 . . . . . . . . . . . . . . . . . . . . . . . .
3
subcontractors, public stenographers, or auctioneers who
What’s New for 2010 . . . . . . . . . . . . . . . . . . . . . . . .
3
are in an independent trade, business, or profession in
which they offer their services to the general public are
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
generally independent contractors. However, whether they
are independent contractors or employees depends on the
Photographs of Missing Children . . . . . . . . . . . . .
4
facts in each case. The general rule is that an individual is
1. Filing and Paying Business Taxes . . . . . . . . .
5
an independent contractor if the payer has the right to
control or to direct only the result of the work and not how it
2. Accounting Periods and Methods . . . . . . . . . . 11
will be done. The earnings of a person who is working as
3. Dispositions of Business Property . . . . . . . . . 16
an independent contractor are subject to self-employment
tax. For more information on determining whether you are
4. General Business Credits . . . . . . . . . . . . . . . . 18
an employee or independent contractor, see Publication
15-A, Employer’s Supplemental Tax Guide.
5. Business Income . . . . . . . . . . . . . . . . . . . . . . . 20
6. How To Figure Cost of Goods Sold . . . . . . . . . 27
Statutory employee. A statutory employee has a
checkmark in box 13 of his or her Form W-2, Wage and
7. Figuring Gross Profit . . . . . . . . . . . . . . . . . . . . 29
Tax Statement. Statutory employees use Schedule C or
C-EZ to report their wages and expenses.
8. Business Expenses . . . . . . . . . . . . . . . . . . . . . 31
9. Figuring Net Profit or Loss . . . . . . . . . . . . . . . 40
Limited liability company (LLC). A limited liability com-
pany (LLC) is an entity formed under state law by filing
10. Self-Employment (SE) Tax . . . . . . . . . . . . . . . . 41
articles of organization. Generally, a single-member LLC is
11. Your Rights as a Taxpayer . . . . . . . . . . . . . . . 45
disregarded as an entity separate from its owner and
reports its income and deductions on its owner’s federal
12. How To Get More Information . . . . . . . . . . . . . 47
income tax return. An owner who is an individual may use
Schedule C or C-EZ.
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Husband and wife business. If you and your spouse
jointly own and operate an unincorporated business and
Introduction
share in the profits and losses, you are partners in a
partnership, whether or not you have a formal partnership
The purpose of this publication is to provide general infor-
mation about the federal tax laws that apply to small
agreement. Do not use Schedule C or C-EZ. Instead, file
business owners who are sole proprietors and to statutory
Form 1065, U.S. Return of Partnership Income. For more
employees. This publication has information on business
information, see Publication 541, Partnerships.
income, expenses, and tax credits that may help you file
Exception—Community income. If you and your
your income tax return.
spouse wholly own an unincorporated business as com-
munity property under the community property laws of a
Are you self-employed? You are self-employed if you
state, foreign country, or U.S. possession, you can treat
carry on a trade or business as a sole proprietor or an
the business either as a sole proprietorship or a partner-
independent contractor.
ship. The only states with community property laws are
Arizona, California, Idaho, Louisiana, Nevada, New Mex-
Sole proprietor. A sole proprietor is someone who owns
ico, Texas, Washington, and Wisconsin. A change in your
an unincorporated business by himself or herself. How-
reporting position will be treated as a conversion of the
ever, if you are the sole member of a domestic limited
entity.
liability company (LLC), you are not a sole proprietor if you
Exception—Qualified joint venture. If you and your
elect to treat the LLC as a corporation.
spouse materially participate as the only members of a
Trade or business. A trade or business is generally an
jointly owned and operated business, and you file a joint
activity carried on to make a profit. The facts and circum-
return for the tax year, you can make a joint election to be
stances of each case determine whether or not an activity
taxed as a qualified joint venture instead of a partnership.
is a trade or business. You do not need to actually make a
To make this election, you must divide all items of income,
profit to be in a trade or business as long as you have a
gain, loss, deduction, and credit between you and your
profit motive. You do need to make ongoing efforts to
spouse in accordance with your respective interests in the
further the interests of your business.
venture. Each of you must file a separate Schedule C or
You do not have to carry on regular full-time business
C-EZ.
activities to be self-employed. Having a part-time business
Page 2
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This publication does not cover the topics listed in the
1-800-829-1040. We cannot answer tax questions sent to
following table.
either of the above addresses.
IF you need information about:
THEN you should
see:
What’s New for 2009
Corporations . . . . . . . . . . . . . . . . . Publication 542
The following are some of the tax changes for 2009. For
Farming . . . . . . . . . . . . . . . . . . . . Publication 225
information on other changes, go to www.irs.gov, and click
Fishermen (Capital Construction
on Forms and Publications. Then, click on What’s Hot in
Fund) . . . . . . . . . . . . . . . . . . . . . . Publication 595
forms and publications.
Partnerships . . . . . . . . . . . . . . . . . Publication 541
Passive activities . . . . . . . . . . . . . . Publication 925
S e l f - e m p l o y m e n t t a x . T h e m a x i m u m n e t
Recordkeeping . . . . . . . . . . . . . . . Publication 583
self-employment earnings subject to the social security
Rental . . . . . . . . . . . . . . . . . . . . . . Publication 527
part of the self-employment tax increases to $106,800 for
S corporations . . . . . . . . . . . . . . . . Instructions for
2009.
Form 1120S
Optional method to figure net earnings. For tax years
beginning after 2007, the amount of gross and net income
What you need to know. Table A (shown later) provides
from self-employment you may have when using the non-
a list of questions you need to answer to help you meet
farm optional method or the farm optional method to figure
your federal tax obligations. After each question is the
your self-employment tax has increased. This allows elect-
location in this publication where you will find the related
ing taxpayers to secure up to four credits of social security
discussion.
benefits coverage. In future years, the threshold will be
IRS mission. Provide America’s taxpayers top quality
increased to maintain that level of coverage. See chapter
service by helping them understand and meet their tax
10 for more information.
responsibilities and by applying the tax law with integrity
and fairness to all.
Section 179 deduction dollar limit. For tax years begin-
ning in 2009, the maximum section 179 expense deduction
Comments and suggestions. We welcome your com-
is $250,000 (higher limits apply to certain property). For
ments about this publication and your suggestions for
more information, see Depreciation in chapter 8.
future editions.
You can write to us at the following address:
Standard mileage rate. For 2009, the standard mileage
rate for the cost of operating your car, van, pickup, or panel
Internal Revenue Service
truck for business miles is 55 cents per mile. For more
Business Forms and Publications Branch
information, see Car and Truck Expenses in chapter 8.
SE:W:CAR:MP:T:B
1111 Constitution Ave. NW, IR-6526
Additional tax relief for businesses affected by the
Washington, DC 20224
Kansas storms and tornadoes. Special rules not cov-
ered in this publication may apply. For more information,
We respond to many letters by telephone. Therefore, it
see Publication 4492-A, Information for Taxpayers Af-
would be helpful if you would include your daytime phone
fected by the May 4, 2007, Kansas Storms and Tornadoes.
number, including the area code, in your correspondence.
Additional tax relief for affected businesses in the
You can email us at *taxforms@irs.gov. (The asterisk
must be included in the address.) Please put “Publications
Midwestern disaster areas. Special rules not covered in
Comment” on the subject line. Although we cannot re-
this publication may apply. For more information, see Pub-
spond individually to each email, we do appreciate your
lication 4492-B, Information for Affected Taxpayers in the
feedback and will consider your comments as we revise
Midwestern Disaster Areas.
our tax products.
Additional tax relief for businesses affected by feder-
Ordering forms and publications. Visit www.irs.gov/
ally declared disasters. Special rules not covered in this
formspubs to download forms and publications, call
publication may apply. For more information, see Publica-
1-800-829-3676, or write to the address below and receive
tion 547, Casualties, Disasters, and Thefts.
a response within 10 days after your request is received.
Internal Revenue Service
What’s New for 2010
1201 N. Mitsubishi Motorway
Bloomington, IL 61705-6613
The following are some of the tax changes for 2010. For
information on other changes, go to www.irs.gov, and click
Tax questions. If you have a tax question, check the
on Forms and Publications. Then, click on What’s Hot in
information available on www.irs.gov or call
forms and publications.
Publication 334 (2009)
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Table A. What You Need To Know About Federal Taxes
(Note. The following is a list of questions you may need to answer so you can fill out your federal income tax
return. Chapters are given to help you find the related discussion in this publication.)
What must I know
Where to find the answer
What kinds of federal taxes do I have to pay? How do I pay them?
See chapter 1 (page 6).
What forms must I file?
See chapter 1 (page 10).
What must I do if I have employees?
See Employment Taxes in chapter 1
(page 9).
Do I have to start my tax year in January, or can I start it in any other
See Accounting Periods in chapter 2
month?
(page 12).
What method can I use to account for my income and expenses?
See Accounting Methods in chapter 2
(page 12).
What kinds of business income do I have to report on my tax return?
See chapter 5 (page 20).
What kinds of business expenses can I deduct on my tax return?
See Business Expenses in chapter 8
(page 31).
What kinds of expenses are not deductible as business expenses?
See Expenses You Cannot Deduct in
chapter 8 (page 40).
What happens if I have a business loss? Can I deduct it?
See chapter 9 (page 40).
What must I do if I disposed of business property during the year?
See chapter 3 (page 16).
What are my rights as a taxpayer?
See chapter 11 (page 45).
Where do I go if I need help with federal tax matters?
See chapter 12 (page 47).
S e l f - e m p l o y m e n t t a x . T h e m a x i m u m n e t
3. Transactions for which you have, or a related party
self-employment earnings subject to the social security
has, contractual protection against disallowance of
part of the self-employment tax remains at $106,800 for
the tax benefits,
2010.
4. Transactions that result in losses of at least $2 mil-
lion in any single tax year ($50,000 if from certain
Standard mileage rate. For 2010, the standard mileage
foreign currency transactions) or $4 million in any
rate for the cost of operating your car, van, pickup, or panel
combination of tax years, and
truck for business miles is 50 cents per mile. For more
information, see Car and Truck Expenses in chapter 8.
5. Transactions the same or substantially similar to one
of the types of transactions the IRS has identified as
a transaction of interest.
Reminders
For more information, see the Instructions for Form 8886.
Accounting methods. Certain small business taxpayers
may be eligible to adopt or change to the cash method of
Photographs of Missing
accounting and may not be required to account for invento-
ries. For more information, see Inventories in chapter 2.
Children
Reportable transactions. You must file Form 8886, Re-
The Internal Revenue Service is a proud partner with the
portable Transaction Disclosure Statement, to report cer-
National Center for Missing and Exploited Children. Photo-
tain transactions. You may have to pay a penalty if you are
graphs of missing children selected by the Center may
required to file Form 8886 but do not do so. You may also
appear in this publication on pages that would otherwise
have to pay interest and penalties on any reportable trans-
be blank. You can help bring these children home by
action understatements. Reportable transactions include:
looking at the photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
1. Transactions the same as or substantially similar to
tax avoidance transactions identified by the IRS,
2. Transactions offered to you under conditions of confi-
dentiality for which you paid an advisor a minimum
fee,
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1-800-772-1213. It is also available from the SSA website
at www.socialsecurity.gov.
1.
Individual taxpayer identification number (ITIN). The
IRS will issue an ITIN if you are a nonresident or resident
alien and you do not have and are not eligible to get an
Filing and Paying
SSN. In general, if you need to obtain an ITIN, you must
attach Form W-7, Application for IRS Individual Taxpayer
Business Taxes
Identification Number, with your signed, original, com-
pleted tax return and any other required documentation
and mail them to the following address.
Introduction
Internal Revenue Service
This chapter explains the business taxes you may have to
ITIN Operation
pay and the forms you may have to file. It also discusses
P.O. Box 149342
taxpayer identification numbers.
Austin, TX 78714-9342
Table 1-1 lists the benefits of filing electronically.
Table 1-2 lists the federal taxes you may have to pay,
The exceptions are covered in detail in the instructions
their due dates, and the forms you use to report them.
for Form W-7. If you must include another person’s SSN
on your return and that person does not have and cannot
Table 1-3 provides checklists that highlight the typical
get an SSN, enter that person’s ITIN. The application is
forms and schedules you may need to file if you ever go out
also available in Spanish. The form is available from the
of business.
IRS website at www.irs.gov or you can call
You may want to get Publication 509, Tax Calen-
1-800-829-3676 to order the form.
TIP
dars. It has tax calendars that tell you when to file
An ITIN is for tax use only. It does not entitle the
returns and make tax payments.
holder to social security benefits or change the
!
CAUTION
holder’s employment or immigration status.
Useful Items
Employer identification number (EIN). You must also
You may want to see:
have an EIN to use as a taxpayer identification number if
you do either of the following.
Publication
• Pay wages to one or more employees.
t 505
Tax Withholding and Estimated Tax
• File pension or excise tax returns.
Form (and Instructions)
If you must have an EIN, include it along with your SSN
t 1040 U.S. Individual Income Tax Return
on your Schedule C or C-EZ.
t 1040-ES Estimated Tax for Individuals
You can apply for an EIN:
t Sch C (Form 1040) Profit or Loss From Business
• Online by clicking on the EIN link at www.irs.gov/
businesses/small. The EIN is issued immediately
t Sch C-EZ (Form 1040) Net Profit From Business
once the application information is validated.
t Sch SE (Form 1040) Self-Employment Tax
• By telephone at 1-800-829-4933 from 7:00 a.m. to
See chapter 12 for information about getting publica-
10:00 p.m. in your local time zone.
tions and forms.
• By mailing or faxing Form SS-4, Application for Em-
ployer Identification Number.
Identification Numbers
New EIN. You may need to get a new EIN if either the
form or the ownership of your business changes. For more
This section explains three types of taxpayer identification
information, see Publication 1635, Understanding Your
numbers, who needs them, when to use them, and how to
EIN.
get them.
When you need identification numbers of other per-
sons. In operating your business, you will probably make
Social security number (SSN). Generally, use your SSN
certain payments you must report on information returns.
as your taxpayer identification number. You must put this
These payments are discussed under Information Re-
number on each of your individual income tax forms, such
turns, later in this chapter. You must give the recipient of
as Form 1040 and its schedules.
these payments (the payee) a statement showing the total
To apply for an SSN, use Form SS-5, Application for a
amount paid during the year. You must include the payee’s
Social Security Card. This form is available at Social Se-
identification number and your identification number on the
curity Administration (SSA) offices or by calling
returns and statements.
Chapter 1 Filing and Paying Business Taxes
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Employee. If you have employees, you must get an
IRS e-file (Electronic Filing)
SSN from each of them. Record the name and SSN of
each employee exactly as they are shown on the em-
ployee’s social security card. If the employee’s name is not
correct as shown on the card, the employee should re-
quest a new card from the SSA. This may occur if the
employee’s name was changed due to marriage or di-
You may be able to file your tax returns electronically using
vorce.
an IRS e-file option. Table 1-1 lists the benefits of IRS
Form W-4, Employee’s Withholding Allowance Certifi-
e-file. IRS e-file uses automation to replace most of the
cate, is completed by each employee so the correct federal
manual steps needed to process paper returns. As a re-
income tax can be withheld from their pay.
sult, the processing of e-file returns is faster and more
If your employee does not have an SSN, he or she
accurate than the processing of paper returns. As with a
should file Form SS-5 with the SSA.
paper return, you are responsible for making sure your
return contains accurate information and is filed on time.
Other payee. If you make payments to someone who is
Using e-file does not affect your chances of an IRS
not your employee and you must report the payments on
examination of your return.
an information return, get that person’s SSN. If you must
You can file most commonly used business forms using
report payments to an organization, such as a corporation
IRS e-file. For more information, visit the IRS website at
or partnership, you must get its EIN.
www.irs.gov.
To get the payee’s SSN or EIN, use Form W-9, Request
for Taxpayer Identification Number and Certification.
Electronic signatures. Paperless filing is easier than you
A payee who does not provide you with an identification
think and it’s available to most taxpayers who file electroni-
number may be subject to backup withholding. For infor-
cally—including those first-time filers who were 16 or older
mation on backup withholding, see the Form W-9 instruc-
at the end of 2009. If you file electronically using tax
tions and the General Instructions for Certain Information
preparation software or a tax professional, you will partici-
Returns (1098, 1099, 3921, 3922, 5498, and W-2G).
pate in the Self-Select PIN (personal identification number)
program. If you are married filing jointly, you and your
spouse will each need to create a PIN and enter these
PINs as your electronic signatures.
Income Tax
To create a PIN, you must know your adjusted gross
income (AGI) from your originally filed 2008 income tax
This part explains whether you have to file an income tax
return (not from an amended return, Form 1040X, or any
return and when you file it. It also explains how you pay the
math error notice from the IRS). You will also need to
tax.
provide your date of birth (DOB). Make sure your DOB is
accurate and matches the information on record with the
Do I Have To File
Social Security Administration before you e-file. To do this,
an Income Tax Return?
check your annual Social Security Statement.
With a Self-Select PIN, there is nothing to sign and
You have to file an income tax return for 2009 if your net
nothing to mail—not even your Forms W-2. For more
earnings from self-employment were $400 or more. If your
details on the Self-Select PIN program, visit the IRS web-
net earnings from self-employment were less than $400,
site at www.irs.gov.
you still have to file an income tax return if you meet any
State returns. In most states, you can file an electronic
other filing requirement listed in the Form 1040 instruc-
state return simultaneously with your federal return. For
tions.
more information, check with your local IRS office, state
tax agency, tax professional, or the IRS website at www.
How Do I File?
irs.gov.
File your income tax return on Form 1040 and attach
Refunds. You can have your refund check mailed to you,
Schedule C or Schedule C-EZ. Enter the net profit or
or you can have your refund deposited directly to your
loss from Schedule C or Schedule C-EZ on page 1 of Form
checking or savings account.
1040. Use Schedule C to figure your net profit or loss from
With e-file, your refund will be issued in half the time as
your business. If you operated more than one business as
when filing on paper. Most refunds are issued within 3
a sole proprietorship, you must attach a separate Schedule
weeks. If you choose Direct Deposit, you can receive your
C for each business. You can use the simpler Schedule
refund in as few as 10 days.
C-EZ if you operated only one business as a sole proprie-
Offset against debts. As with a paper return, you may
torship, you did not have a net loss, and you meet the other
not get all of your refund if you owe certain past-due
requirements listed in Part I of the schedule.
amounts, such as federal tax, state tax, a student loan, or
child support. You will be notified if the refund you claimed
has been offset against your debts.
Refund inquiries. You can check the status of your re-
fund if it has been at least 3 weeks from the date you filed
Page 6
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your return. Be sure to have a copy of your tax return
Using Your Personal Computer
available because you will need to know the filing status,
the first social security number shown on the return, and
A computer with Internet access is all you need to file your
the exact whole-dollar amount of the refund. To check on
tax return using IRS e-file. When you use your personal
your refund, do one of the following.
computer, you can e-file your return from your home any
time of the day or night. Sign your return electronically
• Go to www.irs.gov, and click on Where’s My Refund.
using a self-selected PIN to complete the process. There is
• Call 1-800-829-4477 for automated refund informa-
no signature form to submit or Forms W-2 to send in.
tion, and follow the recorded instructions.
Free Internet filing options. More taxpayers can now
• Call 1-800-829-1954 during the hours shown in your
prepare and e-file their individual income tax returns free
form instructions.
using commercial tax preparation software accessible
through www.irs.gov or www.usa.gov. The IRS is partner-
ing with the tax software industry to offer free preparation
Balance due. If you owe tax, you must pay it by April 15,
and filing services to a significant number of taxpayers.
2010, to avoid late-payment penalties and interest. You
Security and privacy certificate programs will assure tax
can make your payment electronically by scheduling an
data is safe and secure. To see if you qualify for these
electronic funds withdrawal from your checking or savings
services, visit the Free Internet Filing Homepage at www.
account or by credit card.
irs.gov.
If you cannot use the free services, you can buy tax
Using an Authorized IRS e-file Provider
preparation software at various electronics stores or com-
puter and office supply stores. You can also download
Many tax professionals can electronically file paperless
software from the Internet or prepare and file your return
returns for their clients. You have two options.
completely online by using tax preparation software avail-
able on the Internet.
1. You can prepare your return, take it to an authorized
IRS e-file provider, and have the provider transmit it
electronically to the IRS.
Filing Through Employers and Financial
Institutions
2. You can have an authorized IRS e-file provider pre-
pare your return and transmit it for you electronically.
Some businesses offer free e-file to their employees,
You will be asked to complete Form 8879, IRS e-file
members, or customers. Others offer it for a fee. Ask your
Signature Authorization, to authorize the provider to enter
employer or financial institution if they offer IRS e-file as an
your self-selected PIN on your return.
employee, member, or customer benefit.
Depending on the provider and the specific services
requested, a fee may be charged. To find an authorized
Free Help With Your Return
IRS e-file provider near you, go to www.irs.gov or look for
an “Authorized IRS e-file Provider” sign.
Free help in preparing your return is available nationwide
from IRS-trained volunteers. The Volunteer Income Tax
Assistance (VITA) program is designed to help low-income
taxpayers, and the Tax Counseling for the Elderly (TCE)
program is designed to assist taxpayers age 60 or older
Table 1-1. Benefits of IRS e-file
Accuracy
•
Your chance of getting an error notice from the IRS is significantly reduced.
Security
•
Your privacy and security are assured.
Electronic signatures
•
Create your own personal identification number (PIN) and file a completely
paperless return through your tax preparation software or tax professional. There is
nothing to mail.
Proof of acceptance
•
You receive an electronic acknowledgment within 48 hours that the IRS has
accepted your return for processing.
Fast refunds
•
You get your refund faster with Direct Deposit—in as few as 10 days.
Free Internet filing options • Use the IRS website www.irs.gov to access commercial tax preparation and e-file
services available at no cost to eligible taxpayers.
Electronic payment
•
Convenient, safe, and secure electronic payment options are available. E-file and
options
pay your taxes in a single step. Schedule an electronic funds withdrawal from your
checking or savings account (up to and including April 15, 2010) or pay by credit
card.
Federal/State filing
•
Prepare and file your federal and state tax returns together and double the benefits
you get from e-file.
Chapter 1 Filing and Paying Business Taxes
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with their tax returns. Some locations offer free electronic
Penalty for underpayment of tax. If you did not pay
filing.
enough income tax and self-employment tax for 2009 by
withholding or by making estimated tax payments, you
may have to pay a penalty on the amount not paid. The IRS
When Is My Tax Return Due?
will figure the penalty for you and send you a bill. Or you
Form 1040 for calendar year 2009 is due by April 15, 2010.
can use Form 2210, Underpayment of Estimated Tax by
If you use a fiscal year (explained in chapter 2), your return
Individuals, Estates, and Trusts, to see if you have to pay a
is due by the 15th day of the 4th month after the end of your
penalty and to figure the penalty amount. For more infor-
fiscal year. If you file late, you may have to pay penalties
mation, see Publication 505.
and interest.
If you cannot file your return on time, use Form 4868,
Application for Automatic Extension of Time To File U.S.
Self-Employment (SE) Tax
Individual Income Tax Return, to request an automatic
6-month extension. For calendar year taxpayers, this will
Self-employment tax (SE tax) is a social security and
extend the tax filing due date until October 15. Filing an
Medicare tax primarily for individuals who work for them-
extension does not extend the time to pay your taxes, only
selves. It is similar to the social security and Medicare
the time to file the tax return.
taxes withheld from the pay of most wage earners.
If you earned income as a statutory employee,
How Do I Pay Income Tax?
you do not pay SE tax on that income.
!
CAUTION
Federal income tax is a pay-as-you-go tax. You must pay it
as you earn or receive income during the year. An em-
ployee usually has income tax withheld from his or her pay.
Social security coverage. Social security benefits are
If you do not pay your tax through withholding, or do not
available to self-employed persons just as they are to
pay enough tax that way, you might have to pay estimated
wage earners. Your payments of SE tax contribute to your
tax. You generally have to make estimated tax payments if
coverage under the social security system. Social security
you expect to owe taxes, including self-employment tax
coverage provides you with retirement benefits, disability
(discussed later), of $1,000 or more when you file your
benefits, survivor benefits, and hospital insurance (Medi-
return. Use Form 1040-ES to figure and pay the tax. If you
care) benefits.
do not have to make estimated tax payments, you can pay
any tax due when you file your return. For more information
By not reporting all of your self-employment in-
on estimated tax, see Publication 505, Tax Withholding
come, you could cause your social security bene-
!
and Estimated Tax.
CAUTION
fits to be lower when you retire.
What are my payment options? You can pay your esti-
How to become insured under social security. You
mated tax electronically using various options. If you pay
must be insured under the social security system before
electronically, there is no need to mail in Form 1040-ES
you begin receiving social security benefits. You are in-
payment vouchers. These options include:
sured if you have the required number of credits (also
1. Paying electronically through the Electronic Federal
called quarters of coverage), discussed next.
Tax Payment System (EFTPS).
Earning credits in 2009 and 2010. For 2009, you re-
2. Paying by authorizing an electronic funds withdrawal
ceived one credit, up to a maximum of four credits, for each
when you file Form 1040 electronically.
$1,090 ($1,120 for 2010) of income subject to social secur-
ity taxes. Therefore, for 2009, if you had income
3. Paying by credit card over the phone or by Internet.
(self-employment and wages) of $4,360 that was subject to
Other options include crediting an overpayment from your
social security taxes, you received four credits ($4,360 ÷
2009 return to your 2010 estimated tax, or mailing a check
$1,090).
or money order with a Form 1040-ES payment voucher.
For an explanation of the number of credits you must
have to be insured and the benefits available to you and
EFTPS
your family under the social security program, consult your
nearest Social Security Administration (SSA) office.
1. To enroll in EFTPS, go to www.eftps.gov or call
1-800-555-4477.
Making false statements to get or to increase
social security benefits may subject you to penal-
2. When you request a new EIN and you will have a tax
!
CAUTION
ties.
obligation, you are automatically enrolled in EFTPS.
3. Benefits of EFTPS:
The Social Security Administration (SSA) time limit for
posting self-employment income. Generally, the SSA
a. The chance of an error in making your payments
will give you credit only for self-employment income re-
is reduced.
ported on a tax return filed within 3 years, 3 months, and 15
b. You receive immediate confirmation of every
days after the tax year you earned the income. If you file
transaction.
your tax return or report a change in your self-employment
Page 8
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income after this time limit, the SSA may change its rec-
to help you determine whether an individual is an indepen-
ords, but only to remove or reduce the amount. The SSA
dent contractor or an employee.
will not change its records to increase your
If you incorrectly classify an employee as an
self-employment income.
independent contractor, you may be held liable
!
CAUTION
for employment taxes for that worker plus a pen-
Who must pay self-employment tax. You must pay SE
alty.
tax and file Schedule SE (Form 1040) if either of the
following applies.
An independent contractor is someone who is
self-employed. You do not generally have to withhold or
1. Your net earnings from self-employment (excluding
pay any taxes on payments to an independent contractor.
church employee income) were $400 or more.
2. You had church employee income of $108.28 or
more.
Excise Taxes
The SE tax rules apply no matter how old you are
This section identifies some of the excise taxes you may
and even if you are already receiving social se-
have to pay and the forms you have to file if you do any of
!
CAUTION
curity or Medicare benefits.
the following.
• Manufacture or sell certain products.
SE tax rate. The SE tax rate on net earnings is 15.3%
• Operate certain kinds of businesses.
(12.4% social security tax plus 2.9% Medicare tax).
• Use various kinds of equipment, facilities, or prod-
Maximum earnings subject to SE tax. Only the first
ucts.
$106,800 of your combined wages, tips, and net earnings
in 2009 is subject to any combination of the 12.4% social
• Receive payment for certain services.
security part of SE tax, social security tax, or railroad
For more information on excise taxes, see Publication 510,
retirement (tier 1) tax.
Excise Taxes.
All your combined wages, tips, and net earnings in 2009
are subject to any combination of the 2.9% Medicare part
Form 720. The federal excise taxes reported on Form
of SE tax, social security tax, or railroad retirement (tier 1)
720, Quarterly Federal Excise Tax Return, consist of sev-
tax.
eral broad categories of taxes, including the following.
If your wages and tips are subject to either social secur-
ity or railroad retirement (tier 1) tax, or both, and total at
• Environmental taxes on the sale or use of
least $106,800, do not pay the 12.4% social security part of
ozone-depleting chemicals and imported products
the SE tax on any of your net earnings. However, you must
containing or manufactured with these chemicals.
pay the 2.9% Medicare part of the SE tax on all your net
• Communications and air transportation taxes.
earnings.
• Fuel taxes.
Deduct one-half of your SE tax as an adjustment
TIP
to income on line 27 of Form 1040.
• Tax on the first retail sale of heavy trucks, trailers,
and tractors.
• Manufacturers taxes on the sale or use of a variety
More information. For information on methods of calcu-
of different articles.
lating SE tax, see Chapter 10, Self-Employment Tax.
Form 2290. There is a federal excise tax on the use of
certain trucks, truck tractors, and buses on public high-
Employment Taxes
ways. The tax applies to vehicles having a taxable gross
weight of 55,000 pounds or more. Report the tax on Form
If you have employees, you will need to file forms to report
2290, Heavy Highway Vehicle Use Tax Return. For more
employment taxes. Employment taxes include the follow-
information, see the Instructions for Form 2290.
ing items.
Depositing excise taxes. If you have to file a quarterly
• Social security and Medicare taxes.
excise tax return on Form 720, you may have to deposit
• Federal income tax withholding.
your excise taxes before the return is due. For details on
depositing excise taxes, see the Instructions for Form 720.
• Federal unemployment (FUTA) tax.
For more information, see Publication 15 (Circular E),
Employer’s Tax Guide. That publication explains your tax
Information Returns
responsibilities as an employer.
To help you determine whether the people working for
If you make or receive payments in your business, you
you are your employees, see Publication 15-A, Employer’s
may have to report them to the IRS on information returns.
Supplemental Tax Guide. That publication has information
The IRS compares the payments shown on the information
Chapter 1 Filing and Paying Business Taxes
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Table 1-2. Which Forms Must I File?
IF you are liable for:
THEN use Form:
DUE by:1
Income tax
1040 and Schedule C or C-EZ2
15th day of 4th month after end of
tax year.
Self-employment tax
Schedule SE
File with Form 1040.
Estimated tax
1040-ES
15th day of 4th, 6th, and 9th months
of tax year, and 15th day of 1st
month after the end of tax year.
Social security and Medicare taxes
941 or 944
April 30, July 31, October 31, and
and income tax withholding
January 314.
8109 (to make deposits)3
See Publication 15.
Providing information on social
W-2 (to employee)
January 314.
security and Medicare taxes and
income tax withholding
W-2 and W-3 (to the Social Security
Last day of February (March 31 if
Administration)
filing electronically)4.
Federal unemployment (FUTA) tax
940
January 314.
8109 (to make deposits)3
April 30, July 31, October 31, and
January 31, but only if the liability for
unpaid tax is more than $500.
Filing information returns for
See Information Returns
Forms 1099–to the recipient by
payments to nonemployees and
January 31 and to the IRS by
transactions with other persons
February 28 (March 31 if filing
electronically).
Other forms—see the General
Instructions for Certain Information
Returns (1098, 1099, 3921, 3922,
5498, and W-2G).
Excise tax
See Excise Taxes
See the instructions to the forms.
1 If a due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday. For
more information, see Publication 509, Tax Calendars For use in 2010.
2 File a separate schedule for each business.
3 Do not use if you deposit taxes electronically.
4 See the form instructions if you go out of business, change the form of your business, or stop paying wages.
returns with each person’s income tax return to see if the
• Royalty payments of $10 or more.
payments were included in income. You must give a copy
• Payments to certain crew members by operators of
of each information return you are required to file to the
fishing boats.
recipient or payer. In addition to the forms described be-
low, you may have to use other returns to report certain
You also use Form 1099-MISC to report your sales of
kinds of payments or transactions. For more details on
$5,000 or more of consumer goods to a person for resale
information returns and when you have to file them, see
anywhere other than in a permanent retail establishment.
the General Instructions for Certain Information Returns
(1098, 1099, 3921, 3922, 5498, and W-2G).
Form W-2. You must file Form W-2, Wage and Tax State-
ment, to report payments to your employees, such as
Form 1099-MISC. Use Form 1099-MISC, Miscellaneous
wages, tips, and other compensation, withheld income,
Income, to report certain payments you make in your
social security, and Medicare taxes, and advance earned
business. These payments include the following items.
income credit payments. For more information on what to
• Payments of $600 or more for services performed
report on Form W-2, see the Instructions for Forms W-2
for your business by people not treated as your em-
and W-3.
ployees, such as fees to subcontractors, attorneys,
accountants, or directors.
Penalties. The law provides for the following penalties if
• Rent payments of $600 or more, other than rents
you do not file Form 1099-MISC or Form W-2 or do not
paid to real estate agents.
correctly report the information. For more information, see
• Prizes and awards of $600 or more that are not for
the General Instructions for Certain Information Returns
services, such as winnings on TV or radio shows.
(1098, 1099, 3921, 3922, 5498, and W-2G).
Page 10
Chapter 1 Filing and Paying Business Taxes

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Document Outline

• Contents
• Introduction
• What's New for 2009
• What's New for 2010
• Reminders
• Photographs of Missing Children
• Filing and Paying Business Taxes
  • Introduction
  • Identification Numbers
  • Income Tax
    • Do I Have To File an Income Tax Return?
    • How Do I File?
    • IRS e-file (Electronic Filing)
    • When Is My Tax Return Due?
    • How Do I Pay Income Tax?
  • Self-Employment (SE) Tax
  • Employment Taxes
  • Excise Taxes
  • Information Returns
• Accounting Periods and Methods
  • Introduction
  • Accounting Periods
  • Accounting Methods
    • Cash Method
    • Accrual Method
    • Combination Method
    • Inventories
    • Uniform Capitalization Rules
    • Special Methods
    • Change in Accounting Method
• Dispositions of Business Property
  • Introduction
  • What Is a Disposition of Property?
  • How Do I Figure a Gain or Loss?
    • Is My Gain or Loss Ordinary or Capital?
    • Is My Capital Gain or Loss Short Term or Long Term?
  • Where Do I Report Gains and Losses?
• General Business Credits
  • Introduction
  • Business Credits
  • How To Claim the Credit
• Business Income
  • Introduction
  • Kinds of Income
    • Bartering for Property or Services
    • Real Estate Rents
    • Personal Property Rents
    • Interest and Dividend Income
    • Canceled Debt
    • Other Income
  • Items That Are Not Income
  • Guidelines for Selected Occupations
  • Accounting for Your Income
• How To Figure Cost of Goods Sold
  • Introduction
  • Figuring Cost of Goods Sold on Schedule C Lines 35 Through 42
    • Line 35 Inventory at Beginning of Year
    • Line 36 Purchases Less Cost of Items Withdrawn for Personal Use
    • Line 37 Cost of Labor
    • Line 38 Materials and Supplies
    • Line 39 Other Costs
    • Line 40 Add Lines 35 through 39
    • Line 41 Inventory at End of Year
    • Line 42 Cost of Goods Sold
• Figuring Gross Profit
  • Introduction
  • Items To Check
  • Testing Gross Profit Accuracy
  • Additions to Gross Profit
• Business Expenses
  • Introduction
  • Bad Debts
  • Car and Truck Expenses
    • Methods for Deducting Car and Truck Expenses
    • Reimbursing Your Employees for Expenses
  • Depreciation
  • Employees' Pay
  • Insurance
  • Interest
  • Legal and Professional Fees
  • Pension Plans
  • Rent Expense
  • Taxes
  • Travel, Meals, and Entertainment
  • Business Use of Your Home
  • Other Expenses You Can Deduct
  • Expenses You Cannot Deduct
• Figuring Net Profit or Loss
  • Introduction
  • Net Operating Losses (NOLs)
  • Not-for-Profit Activities
• Self-Employment (SE) Tax
  • Who Must Pay SE Tax?
    • Special Rules and Exceptions
    • Figuring Earnings Subject to SE Tax
    • Farm Optional Method
    • Using Both Optional Methods
  • Reporting Self-Employment Tax
• Your Rights as a Taxpayer
  • Declaration of Taxpayer Rights
  • Examinations, Appeals, Collections, and Refunds
• How To Get More Information
  • Internal Revenue Service
  • Small Business Administration
  • Other Federal Agencies
• Index

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