The IRS considers you self-employed if any of the following applies to you:
- You are in a trade or business as a sole proprietor or independent contractor
- You are a member of a partnership or limited liability company (LLC) that carries on a trade or business (limited partners are usually exempt; LLC members may be treated as employees if the business makes an election)
- You are otherwise in a business for yourself, including a part-time business
If you are self-employed earning $400 or more per year, you will need to pay self-employment taxes, which consists of Social Security and Medicare taxes, in addition to income taxes. Since you don’t have an employer withholding these taxes from your wages, you must estimate them and pay them quarterly. Use Form 1040-ES for this.
To report your Social Security and Medicare taxes, file Schedule SE on Form 1040.
Husband and wife ventures
There may be some tax advantages for a business run exclusively by a husband and wife. The Small Business and Work Opportunity Act of 2007 allows a husband and wife business to avoid being treated as a partnership for federal tax purposes. Instead, each spouse is treated as a sole proprietor and all income, gains, losses, credits and tax deductions are divided between the spouses based on their respective interests in the venture. This may give each spouse credit for individual Social Security earnings. Like everything involving tax laws, it gets complicated, so consult with your tax advisor to see if you qualify.