As someone who has done exactly what you're planning to do (except
that I did it as a writer rather than a computer consultant), I am
quite familiar with your situation.
The basic answer is yes: You will need to pay taxes on what your earn
and notify the tax agencies of your earnings. Whether you need to do
so in advance depends on your situation.
The self-employment tax is basically a tax to handle what you and your
employer would be paying for Social Security and Medicare. This tax is
in addition to any income taxes.
That tax is explained on this page:
"Self-employment tax (SE tax) is a social security and Medicare tax
primarily for individuals who work for themselves. It is similar to
the social security and Medicare taxes withheld from the pay of most
wage earners. You figure SE tax yourself using Schedule SE (Form
If you earn less than $400 during the year from self-employment, you
don't need to pay the self-employment tax.
If you expect that you will owe $1,000 or more in federal income taxes
at the end of the year, you will need to pay those taxes as you go.
Details about how to do that are on this page:
What I have done is made sure that my withholding from my employer was
large enough to pay for any of my income taxes from self-employment.
(I've done this by claiming fewer deductions on my W-2 form than to
what I'm entitled.) That seems a lot more palatable than writing a
check to the IRS every quarter or so. Of course, how you do that is
up to you. But if you expect to end the year owing more than $1,000 in
federal taxes beyond what you've had withheld, you will need to make
payments during the year. You can be penalized if you don't.
In addition to filling out the forms for the self-employment taxes
with the IRS, you'll need to fill out separate forms to indicate your
income. The exact forms you will fill out depends on the type of
business, whether you depreciate property and that sort of thing. But
chances are you will be able to use Schedule C.
Here are links to the federal forms, then, that you will need:
Schedule ES (estimated tax)
Schedule C (profit or loss from self-employment)
Schedule SE (self employment)
Schedule C is where you would indicate what your businesses expenses
are, including the purchase of computer and office equipment. You
should read the instructions carefully; if you use furniture and that
sort of thing for both household and business use, there may be limits
on how much you can deduct as a business expense. But with anything
that is used exclusively for business use there is no problem. There
also are limits in terms of what you can deduct for meals and that
sort of thing, but other obvious expenses (such as speciality software
you might need to do your job) are fully deductible.
That takes care of your obligations with Uncle Sam. The situation for
Illinois is a bit easier. Illinois bases its income taxes on the
federal rules, so once you fill out the federal forms you can simply
use the total income numbers and plug them into your state form, which
you can download here:
There is no separate self-employment tax. But if you expect to owe
$400 or more on your state income taxes, you will need to make
payments as you go. The form for doing that can be found here:
2004 Estimated Tax Payment Voucher
If any of your work involves something that you'd have to charge sales
tax for (such as if you sold software), you will need to register to
collect sales tax. Information on that procedure is available here:
State Tax Information
You can get information about any business-related tax forms you may
need on this page:
Sales/Withholding Tax Forms
In addition to your federal and state tax obligations, you should also
check to make certain that your business isn't affected by other laws.
You may, for example, need a permit in your city to run a business,
and you may need a rider with your car insurance to make sure it
applies while you are driving for self-employment purposes.
I hope this information is helpful. Best wishes in your business!
Search strategy: Based in part on personal knowledge gained by being
in a similar situation, I searched through the IRS and Indiana
Department of Revenue sites, reading the forms listed above and their
instructions to develop the answer.