Does the IRS Consider You Self Employed?

With all the income opportunities on the Internet, more and more people are blogging, setting up websites, and selling stuff on eBay. It's no surprise then that one of the most frequently asked tax questions is "does the IRS consider me self employed?"

Over the last few years, people have discovered that they can make money on the Internet - whether it's a hobby they have, a craft that they discovered they can sell on a website, or selling items lying around the house on eBay. But does that make them self employed?

The IRS has been cracking down on people making money on the Internet, so that's a good question, and one you should ask yourself if you earn money on the Internet. So, when does a hobby become a business? When does selling on eBay become a taxable event?

According to the IRS, you are self employed if you carry on a trade or business as a sole proprietor, or if you are an independent contractor. Even if your business is part time, or you have a full time job in addition to your business, you are still self employed.

Independent contractors are - in the most basic definition - people who offer their services to the public. If you're a lawyer or accountant offering your services to the public, it's pretty obvious that you are self employed. It's not so obvious when people have business ventures that start out as hobbies.

So how do you know if your online business makes you self employed? Generally, if you are carrying on an activity with the intent to make a profit, you are a business. You don't have to have a formal business name or business agreement to be in business. Something as simple as buying items to sell on eBay is a business, because your goal is to make a profit.

The fact that you have another job (full or part-time) or that you work from home does not mean that you are not self employed. Many businesses start out from a home office. In fact, many profitable businesses are still run from a home office. The IRS doesn't care if your self employment income is earned from home or after completing a nine-to-five Monday through Friday job for your boss. If you earn money from a business activity (even if it started out just as a hobby), then you are self employed.

Once you have determined if you are self employed or not, you need to determine your tax filing responsibilities. Self employed business owners have specific forms that need to be filed, and are subject to their own self employment tax in addition to regular income tax. Failure to follow these rules could result in interest, penalties and even legal action against you.

For more information about being self employed, and your tax responsibilities, please visit www.irs.gov/businesses, where you can find articles, forms and calculators for small businesses and self employed people.

The self employment tax is 15.3%, and this is on top of your regular income tax. As you can imagine, the SE tax can really sneak up on a new business owner, and unfortunately, can be the reason why many businesses fail.

It is very important that you understand the SE tax and also the deductions available to self employed people so that you can minimize the effect of the SE tax. For more information, please visit Your Top Online Biz Tax Questions Answered.