How to Calculate Income for Self Employment

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Employees have it easy at tax time because they receive a W-2 that shows their taxable income. If you're an independent contractor, you must use IRS Schedule C to determine your taxable income from self-employment after accounting for expenses that include advertising, cost of goods sold and deductions for using your car for business.

Gross Revenues

The starting point for figuring your income from self-employment is your gross income, which includes all the money you brought in from your business during the year. This figure can include proceeds from selling goods, payments for completing jobs, and royalties from goods you produced. For example, if you sell $45,000 worth of products and earned another $10,000 from consulting jobs, your gross revenues total $55,000.

Costs of Goods

From your gross revenue, you subtract the cost of any returns or allowances on your goods and the cost of the inventory you sold during the year. Returns occur whenever a customer brings back an item and you issue a refund, such as if the product is damaged or the customer changes his mind. The cost of goods sold equals the amount you pay to acquire the goods that you sell. For example, if you pay $8,000 for lumber, including transportation to your shop where you make furniture, you can deduct that $8,000 from your gross revenue. When filing Schedule C, you calculate your cost of goods sold in Part III and report the total on line 4.

Business Expenses

The cost of the goods you sell isn't the only expense you incur in running your business. Other expenses can include advertising, rent, salaries and benefits you pay to your employees, business taxes, licenses and interest on business loans. If you use a portion of your home exclusively for business, you may also qualify for the home office deduction, which allows you to write off a portion of the expenses incurred from owning your home, such as utilities, property taxes and certain repairs. If you use less than 300 square feet for your home office, you can choose to deduct a flat rate of $5 per square foot instead of a fraction of your expenses. These expenses are listed in Part II of Schedule C, with the total being reported on line 28.

Vehicle Expenses

You can also claim expenses for the business use of your vehicle using either the standard mileage rate or the actual expenses method. If you use the standard mileage rate, you claim a deduction equal to the number of miles you drove for business during the year times the business mileage rate, which is 57.5 cents per mile as of 2015. Alternatively, you can total all your costs for owning the vehicle, such as gas, oil, maintenance, depreciation and registration fees and multiply the result by the percentage of the time your car is used for business purposes. For example, if you use your car for business 70 percent of the time and have actual expenses of $2,000, you could claim a vehicle expense deduction of $1,400. You report your vehicle expenses in Part II on line 9 on Schedule C, but if you claim any vehicle expenses, you must also complete Part IV of Schedule C.