Figuring your self-employment income is the first step in figuring your taxes.
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Employees have it easy when it comes to taxes: The employer withholds Social Security taxes and Medicare taxes automatically and sends a W-2 that tells exactly how much income to report on your tax return. But, when you're self-employed, figuring your gross income is all on you -- and making sure you do it right makes sure you stay on the Internal Revenue Service's good side.
If you have inventory in your self-employed business, you're required to use the accrual accounting method for figuring your income. Otherwise, you can pick between cash and accrual. With the cash method, you include all the income you actually received, even if it was for work you did in a prior year, and the expenses you paid for the current year -- paying expenses for the next year, such as prepaying your insurance, still goes on the following year's tax return. The accrual method, on the other hand, requires you to report the income you earned, even if you haven't yet been paid, and the expenses you
incurred, even if you haven't actually paid the bill yet.
To figure your gross self-employment income, start by calculating all of your income for the year. For most people, that includes payments of cash, check or credit card. However, if you receive non-traditional forms of payment, such as property or services, you also include the fair market value of those items. For example, say you run your own law firm and a client pays you by repairing your roof. If the fair market value of those repairs is $500, you must include $500 on your income taxes.
When you're self-employed, you don't stop with just figuring your income. Instead, you get to reduce your income by the amount of your business expenses. These include any expenses that are ordinary and necessary -- costs that are common and helpful in your line of business -- such as the costs of goods sold, transportation, interest on business loans and overhead. For example, if you have $70,000 of income but had to pay $5,000 for office space and $3,000 in office supplies, your net self-employment income is $62,000.
Self-Employment Tax Income