Do You Have a
Real Business?
Beware of IRS Hobby Rules
If you are self-employed as an independent business owner or partner,
you are responsible for paying your own income tax and social security
(FICA) tax on the profit you make. Your contribution to social security is
called self-employment tax. This tax is not withheld and deposited
regularly like an employee’s FICA. Instead, it is computed at the end of
the year and is added to the income tax liability on your Form 1040.
Self-employment tax is treated as part of your income tax and must be
taken into account in figuring your estimated tax. If you have a net
profit of $400 or more at the end of the year, you are subject to
self-employment tax at the rate of 15.3%.
Self-employment tax is due on income from any trade or business activity
in which you participate on a regular and continuous basis. For instance,
if you regularly rent personal property to your business or to your
employer, such as a vehicle, tools, or other equipment, the profit you
earn is self-employment income and subject to self-employment tax.
There are exceptions, however. For example, if you own real estate and
rent it to your corporation, the income you collect is not subject to
self-employment tax.
