Contractor License Practice Exam

What qualifies as self-employment earnings that require tax payments?

1. Gross income of $400 or more

2. Net earnings of $400 or more

3. Total income of $400 or more

4. Hourly income of $400 or more

The correct answer is: Net earnings of $400 or more

Self-employment earnings that require tax payments are specifically defined as net earnings of $400 or more. This threshold is important because the Internal Revenue Service (IRS) requires individuals who have net earnings from self-employment that meet or exceed this amount to report these earnings and pay self-employment taxes, which includes both Social Security and Medicare taxes. Net earnings are calculated as gross income from self-employment minus allowable business expenses. It's this net figure that determines tax liability, as it represents the actual profit derived from self-employment activities. Understanding this concept is crucial for individuals operating as independent contractors or self-employed, as it informs them of their tax obligations accurately. Other options suggest considering gross income, total income, or hourly income, which do not align with the IRS guidelines for self-employment tax requirements. Gross income is the total income before any deductions are made, while total income includes all sources of income, leading to a misinterpretation of tax obligations. Hourly income does not reflect the overall financial picture necessary for determining whether one meets the requirement for tax payments.