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Self-Employment and Taxation

Self-employed workers are paid directly by clients or by their business, and some proportion of these payments will be due to the government as income tax. Unlike an employee of a company, a self-employed person must pay tax after receiving his taxable income. 

In order to avoid resulting interest payments to the IRS for paying taxes in arrears, self-employed workers in the United States usually pay estimated taxes quarterly, and at the end of the year, the tax return determines if these estimated payments were enough. Another tax implication is that a self-employed worker must pay both the employee and employer portions of the FICA tax (so instead of 6.2%, they must pay 12.4% until they make enough that FICA is no longer paid). Self-employed workers must also pay 2.9% instead of 1.45% for Medicare on all income.

On the other side, self-employed workers can take far more deductions than an ordinary employee. Anytime a self-employed worker visits a client, the trip expenses are deductible (the deduction for driving any car is $0.385 per mile plus any tolls incurred). Other expenses such as uniforms, computer equipment, cell phones, etc. can be deducted if there is a legitimate business use for these items. Since the chances of being audited by the Internal Revenue Service are relatively slim, many self-employed workers likely overstate their deductions. One deduction that has a reputation for raising a "red flag" at the IRS is the deduction for a home office. Many people would simply put a desk in an attic, perhaps with an old computer on it, and try to take a deduction (for depreciation). Home office deductions are legitimate, although it has to be a legitimate office. The IRS will also overrule other flagrant deductions, such as buying a Yacht and naming it after your company, painting the name on the side and calling it an advertising expense. If you're an accountant or dentist, such a deduction likely won't be valid.

If someone is self-employed, but works for only one client, and is otherwise indistinguishable from a regular employee, then the IRS will probably require the company to treat him as a regular employee.

The US Internal Revenue Service provideds Schedule C and SE of Form 1040 to assist self-employed workers in payment of the proper amount of tax.

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