Dependency, Filing Status, and Income Documents
Self-Employment Income (Optional: Advanced Certification)
If the taxpayer operated a business or practiced a profession as a sole proprietor, income and expenses
should be reported on Schedule C. The Schedule C provides a summary of the taxpayer’s income, expenses, and method of accounting for the business. VITA taxpayers with self-employment often have income from contract-based work, including but not limited to rideshare or food delivery, construction, landscaping, and hairstyling.
Self-Employment Scope Restrictions
There are a large variety of tax issues that arise with self-employed taxpayers, due to the fact that income and expenses are largely self-reported and record-keeping practices from taxpayer to taxpayer can vary widely. As a result, the IRS limits the type of Self-Employment returns that the VITA program may complete. This is partially to ensure tax compliance, but it also allows taxpayers the opportunity to explore more complex tax issues that may be beneficial to their business by seeing a paid preparer. This also makes your job easier as the volunteer preparer.
The VITA program places the following restrictions for returns with a Schedule C:
- Have less than $35,000 in business expenses
- Use the cash method of accounting
- If a taxpayer operates on the accrual method of accounting, the self-employment will be out of scope for the VITA program.
- Have no inventory at any time during the year
- Did not have a net loss from the business
- The business in question must have taken in more money in income than the total amount of expenses. Taxpayers who are just starting a business may be out of scope for the VITA program if they had a large number of start-up costs.
- Have no employees during the year or paid contract labor for services
- Do not depreciate any assets
- Do not deduct expenses for business use of a home
- Do not have prior year unallowed passive activity losses from the business
Common Income Reporting Documents for Self-Employed Taxpayers
Self-Employed taxpayers typically have their income reported on a 1099-NEC. This form shows the full amount of income the taxpayer had during the year.
- Form 1099-NEC, nonemployee compensation
- This is the most common reporting document for individuals who are contracted by an established company (Lyft, Postmates, etc.)
- Forms 1099-K, Merchant Card, and Third PartymPayments
- Reports the total amount of income earned during each month of the year.
- Form W-2, Wage and Tax statement with statutory employee (checked in box 13)
- Not very common
- Taxpayer’s books and records
- Common for taxpayers who take in income with each individual transaction (barbers/hairstylists, landscapers, etc.)
Qualified Expenses for Self-Employed Taxpayers
Self employed taxpayers have the ability to subtract business related expenses from their income to offset the costs of providing their professional services. However, it is important to understand which expenses qualify, and how to classify them.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in the taxpayer’s industry. A necessary expense is one that is helpful and appropriate for their trade or business. An expense does not have to be indispensable to be considered necessary.
See the video example below for additional information.