If you are self-employed, whether you have another job or not, you have to pay Self-Employment (SE) taxes by filing Schedule SE with your 1040. SE taxes include social security and Medicare tax, just like those paid by everyone else, but you're responsible for "withholding" them yourself. (For tax purposes, you are only self-employed if your net earnings (profit) from your self-employment are $400 or more per year.)
For the purposes of this post, we're going to focus on sole proprietorships, businesses owned and run by only one person. As a sole proprietor, you can choose to figure and set aside taxes for every "paycheck" or payment you receive for your services. These are your estimated taxes, and they must be paid quarterly. Yes, that's right. If you wait until the end of the year without making quarterly IRS payments, you could get slapped with a sizable tax penalty. If withholding tax from each "paycheck" isn't practical (e.g. you receive many small payments rather than lump sums), you can simply calculate your taxes on your quarterly earnings.
Sole proprietors also need to file Schedule C, Profit or Loss from Business, which is part of Form 1040. Alternatively, you can file Schedule C-EZ if all the following are true:
- your expenses are not greater than $5,000
- you have no employees
- you have no inventory
- you are not using depreciation or deducting the cost of your home
In order to be able to file taxes properly (and get the most $ back), a sole proprietor needs to keep immaculate records and hold onto them for at least four years. (The IRS has this thing called burden of proof. . . .)
If you're newly self-sufficient, i.e. have been self-employed for less than a whole tax year, you'll be operating on a short tax year the first time you file. You can find more info on short period tax returns and other topics relevant to new business owners on the IRS's page on Starting a Business.
Publications and Forms for the Self-Employed
Self-Employed Individuals Tax Center
Business or Hobby? Answer Has Implications for Deductions