Net Profit, Loss, and Self-Employment
Tax
Once you have added up all your gross business income, and you've dug up all your
deductible business expenses for the
year, you can calculate your net business income by subtracting your
expenses from your income. Hopefully, you still have some income
left over after expenses are deducted! This amount is your net profit
for tax purposes.
For sole proprietors, the net profit calculation
is made on the bottom of the front page of your Schedule C or on Line
3 of your C-EZ. If you have more than one Schedule C, the results
from each one are computed separately. The results from any and all
Schedule Cs you have are totaled up and carried over to your individual
income tax return (Form 1040, Line 12), where they will become part
of your adjusted gross income (AGI). If you are filing jointly with
your spouse, the net income from any Schedule Cs filed by your spouse
is also included.
There are three more important issues to
deal with in conjunction with computing your net profit for the year:
- Self-employment taxes - for sole
proprietors, your net business income is the amount on which you must
pay self-employment taxes. So, your net business profit or loss is
also carried over to Line 2 of Schedule SE, which is used to compute
your self-employment (SECA) tax. If your business is a partnership,
LLC, or corporation, you must follow somewhat different rules.
- Additional medicare tax on wages
and self-employment income over applicable thresholds.
- Net operating losses - owning a business
is full of surprises, both good and bad. In some years you may find
that your expenses exceed your gross business income, which means
that you have a loss for the year. You may be able to deduct this
loss against any other income you or your spouse may have, or carry
it over to other years in which you have more income, provided you
meet certain requirements.
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