According to the Small Business Administration (SBA), small business is big business. Defined as an independent business that employs fewer than 500 employees, the SBA reported that there were 33.8 million small businesses in 2024, and 59 million small business employees. About 81% of these small businesses do not employ workers other than the owner. The self-employed could be a sole proprietor, independent contractor, or member of a trade or business partnership.
Like employed workers, the self-employed are responsible for paying into Medicare and Social Security programs. Currently, the Internal Revenue Service (IRS) reports the Social Security tax rate for the self-employed is 12.4%, with the Medicare rate at 2.9%. Self-employment taxes are reported with a Social Security number or individual taxpayer identification number (ITIN) and paid quarterly instead of being collected as payroll tax by an employer.
Depending on your business, you may be able to deduct expenses such as advertising, start-up costs, a home office, health insurance premiums, mileage, and more. Whether or not you work with an accountant to prepare and file your taxes, be aware of the downsides of tax deductions that could lead to an IRS audit.
In the post-pandemic years, marketers on social media offer to assist taxpayers claim a “Self-Employment Tax credit." The credit does not exist but stemmed from a different pandemic-relief program titled “Credits for Sick Leave and Family Leaves.” Refrain from filing for tax credits for which you cannot prove you are qualified—if you have questions, speak with a tax attorney.
An issue that will trigger an audit on anyone’s tax returns is unreported income. Because the self-employed are reporting and paying their own taxes, it can be tempting to skim jobs, receive services for barter, keep two sets of books, or ask for payment in cash. The underreporting of income falls in the realm of filing a false tax return. If you want to steer clear of the curiosity of the IRS—be sure your figures are accurate.
If you employ workers, you need to withhold and report payroll taxes, generally on a quarterly basis. If you use an outsourced vendor for payroll and withholding, remember that you, as the owner, remain responsible and liable for the accurate reporting and pay over of your business payroll tax payments.
As a self-employed business owner, you need to understand regulatory requirements to keep your company compliant. The legal group at Robert J. Fedor, Esq., L.L.C., delivers the guidance needed to keep your operations off the radar of the IRS. If you receive an audit letter, contact our knowledgeable tax attorneys today at 440-250-9709. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.
If you are already facing an audit and are looking for more information, download our free book, The Ultimate Guide to Surviving an IRS Tax Audit, geared toward business owners. This resource offers a deeper understanding of payroll tax laws and practical tips to stay compliant.