Self Employed & Business Taxation

Self-Employed & Business Taxation

This lesson provides required training on the taxation of self-employed individuals and small businesses. It explains how business income is reported, how expenses are deducted, and how self-employment taxes are calculated and applied.

Completion of this lesson is mandatory before preparing or assisting with any self-employed or business tax returns.

Purpose of This Lesson

The purpose of this lesson is to ensure preparers understand the rules governing business income, allowable deductions, and reporting requirements for self-employed taxpayers. Business returns require a higher level of scrutiny and documentation due to increased audit risk.

This lesson establishes firm standards for accuracy, documentation, and compliance when handling business-related returns.

Definition of Self-Employment Income

Self-employment income includes earnings from a trade or business operated by an individual, either as a sole proprietor or independent contractor. This income is commonly reported on Forms 1099-NEC, 1099-K, or through client records when no form is issued.

All business income must be reported, regardless of whether a tax form was received.

Schedule C Overview

Most self-employed taxpayers report business income and expenses on Schedule C. Preparers are responsible for accurately identifying gross receipts, cost of goods sold, and deductible expenses.

Schedule C entries must be reasonable, consistent, and supported by documentation.

Business Expenses & Deductions

Only ordinary and necessary expenses directly related to the business may be deducted. Personal expenses may not be claimed as business deductions, even if paid from a business account.

Preparers must review expenses carefully and ensure that deductions are not overstated or improperly categorized.

Mileage, Home Office & Mixed-Use Expenses

Expenses involving mixed personal and business use require additional documentation and calculation. This includes vehicle mileage, home office deductions, utilities, and equipment.

Preparers must verify eligibility and ensure that business-use percentages are reasonable and properly supported.

Self-Employment Tax Responsibilities

Self-employed taxpayers are subject to self-employment tax, which includes Social Security and Medicare contributions. These taxes are calculated separately from income tax and must be clearly explained to the client.

Preparers must ensure clients understand that higher refunds may be offset by self-employment tax obligations.

Estimated Taxes & Client Education

Many self-employed taxpayers are required to make quarterly estimated tax payments. Preparers should educate clients on estimated tax requirements and the consequences of underpayment.

Failure to inform clients of estimated tax responsibilities may result in penalties and dissatisfaction.

Due Diligence for Business Returns

Business returns require heightened due diligence. Preparers must:

• Question unusually high expenses

• Address income inconsistencies

• Verify business activity legitimacy

• Document explanations provided by the client

Assumptions are not permitted.

Compliance & Quality Review

All self-employed and business tax returns are subject to internal review. Returns that show abnormal patterns, excessive deductions, or missing documentation may be rejected or returned for correction.

Failure to follow business tax compliance standards may result in disciplinary action.

Completion Requirement

This lesson must be completed before a preparer may independently prepare self-employed or business tax returns. All standards taught in this lesson apply throughout the filing season.