1. Why should I report my earnings if I am self-employed?
The obvious answer to this question is that it’s the law. But if you fail to report your earnings as a self-employed worker, you are also cheating yourself out of Social Security, since part of your income is taken to pay directly into that system.
For more on this topic, see my article, A Billboard Message to the Self-Employed.
2. What counts as “self-employment”?
Self-employment is defined as operating a trade, business, or profession. Farming counts as self-employment. You are self-employed both if you run a business yourself and if you have a partner. If your net earnings from a self-directed business activity are more than $400 during a year, you are self-employed and must report those earnings.
3. How do I report my earnings to the Social Security Administration?
After any year that you have net earnings of $400 or more, you should complete these federal tax forms available at the IRS website and send them to the IRS by April 15:
- Form 1040 (U.S. Individual Income Tax Return);
- Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) as appropriate; and
- Schedule SE (Self-Employment Tax)
Note: Even if you don’t owe any income tax (and even if you already get Social Security benefits), you must still fill out your 1040 and Schedule SE so that you can pay self-employment Social Security tax.
4. Is there any type of income that should not be included in my net earnings?
Yes. Here is a list from the SSA detailing the income that does not count for Social Security:
- Dividends from shares of stock and interest on bonds, unless you receive them as a dealer in stocks and securities;
- Interest from loans, unless your business is lending money;
- Rentals from real estate, unless you’re a real estate dealer or regularly provide services mostly for the convenience of the occupant; or
- Income received from a limited partnership.
5. My net earnings were under $400. What should I do?
For these circumstances, there is an optional method of reporting. According to the SSA, you can use the optional method only five times in your life when reporting non-farm income. There is, however, no limit on using the optional method of reporting farm income. (In fact, if your occupation is farming, you can use the optional method every year no matter what your net earnings were.)
The SSA has special rules for farm income. Talk to your tax preparer to see if you qualify.
6. I run a business with my spouse. How should we report our income?
If you operate the business together as partners, both spouses should fill out separate self-employment returns even if you are filing a join income tax return. You should each report your share of the business profits as net earnings. The amounts (as percentages) are for the two of you to decide based on your contributions to the business. For more information, see my article Setting up a “Mom and Pop Shop”? — Plan Carefully When It Comes to Self-Employment Taxes!
Joni Beth Bailey is a Southern Illinois Social Security Disability attorney.