From Forbes — Robert W. Wood writes about the risks that a taxpayer who files a schedule C will be audited by the IRS. He writes:
“A sole proprietorship is the simplest way of conducting business.There’s no business entity and only one owner (although husband and wife filing taxes jointly count as one). Despite its simplicity, there is no question that Schedule C is a big audit target. Every year the IRS releases its Statistics of Income Bulletin. It is dry reading, but carries such data as the number of tax returns filed, the number of types of returns selected for audit, and other statistical data.
And one thing is clear from these dusty figures. Every year, the IRS looks hard at Schedule C. In fact, most tax professionals will tell you that Schedule C is one of the most likely types of returns (or parts of returns) to be audited. A Schedule C could show just a few dollars, or could be a huge business making millions. Schedule C is also the primary place you claim expenses from your proprietorship business. It’s the primary way the IRS can audit a “hobby” activity you claim is a business but the IRS claims is not. Be especially wary if you have several years of losses in a row.
As an independent contractor, you not only owe income tax, but self-employment tax too. On the first $118,500 of income, that’s a whopping 15.3% rate. Beyond $118,500, the rate drops to 2.9%. In contrast, if you’re an employee, you pay only one-half the Social Security tax (your half is 7.65%) on wages up to $118,500, plus one-half the Medicare rate (your half is 1.45%) on all wages. See IRS Publication 225. Your employer pays the same. If you have income over $200,000, you’re subject to an additional 0.9% Medicare tax withholding. The additional Medicare tax does not apply to employers...”
Read the full story at On Demand Workers & Uberpreneurs: It’s Tax Time, You’re Self-Employed, Audits Are Inevitable.