Self-Employed, Independent Contractors, and Taxes

Contractor Versus Wage Employee

Many companies hire workers on contract for certain kinds of work. These are independent contractors who, instead of receiving a W-2 with taxes withheld, receive a for their work. If you pick up and deliverer groceries as a job, drive passengers from place to place, or pick up food orders for someone, you may be employed as an independent contractor. Additionally, those who perform freelance work are generally signed to work on a contract. As such, you may be able to deduct expenses, like and/or gas and mileage on your tax return. 

If you work on your own and you are not an employee, you will pay taxes a little differently than employees do. As a self employed individual, you are required to pay federal incomes taxes, Social Security, and Medicare taxes on your own, either through quarterly estimated tax payments or when you file your tax return. If your estimated tax payments are too large, you will be owed a refund; if too small, you will owe tax.

Taxes must be paid on income as you earn it. If you do not pay enough tax throughout the year, you could be assessed penalties. You must file a tax return if your total self-employment income is a least $400. This is different compared to if you are an employee and these payments are automatically withheld from your pay and paid partially for you by your employer.

If you generated income from freelance work as part of the new gig or sharing economy, consider filing your return on taxpert.com or work with a Taxpert to get your taxes done by filing an independent contractor return.

According to a 2020 survey, there are an estimated 59 million freelancers in the U.S. gig economy alone. Freelancers represent around 33-36% of all U.S. workers and this number has increased by 4.7 million from 2015 to 2020. Perhaps as a result of the 2020 COVID-19 Pandemic many companies are hiring on contract that way freelance workers can work remotely and claim certain self-employment deductions. This makes it easier to set up employment and to work from home, especially if located in a different state than the employer (for example, they would only file a resident state return and not an additional state return for the company location).

Freelancers and the Gig Economy

Types of gig work or freelance work are often on-demand work, short-term services, or providing goods in a short timeframe. Payment may be cash, check, virtual currency, or through a third-party application or website. Many freelance work providers operate on a digital platform, like rideshare services, delivery services, craft selling marketplaces, on-demand labor services, or property rental platforms.

When small to large businesses rely mainly on freelancers or independent contractors compared to permanent employees, then gig refers to a one-off job a person gets paid to do on an infrequent or casual basis. Thus, the income generated in a gig or sharing economy is treated very similar to taxable income as an independent contractor or freelancer. The payer issues a Form 1099 for the tax year in which the work took place and submits it to the payee (freelancer, independent contractor) by January 31 of the subsequent year. This form is typically a 1099-MISC or 1099-NEC and is required to be issued if the contractor is paid at least $600, but the contractor needs to report the income regardless of the form if they make $400 or more.

Typically, freelancers do not register a business. For tax purposes, however, according to the IRS, a freelancer declares their self as self-employed. As such, they technically are their own business - when you prepare your return on Taxpert, you can report your business/self-employment income and the Taxpert Tax App will report your income on Schedule C and generate Schedule SE for you. You bring your income and business information and we will help get it reported on the proper forms.

Even if you do not receive a tax form for this gig work, such as 1099-K, 1099-NEC, etc., it is required to be reported on your income tax return.

The following factors determine the independent contractor status:

• Often wotk remotely at their own location, time
• Work often with more than one client
• Negotiates rates with the payer
• Estimates and pays self-employment taxes during the year and on their tax return
• Is eligible for certain tax deductions, mileage, travel expenses, etc.
• Does not hire employees.

Often, when organizations try to avoid paying benefits, they shift permanent jobs into temporary jobs, thus these employers/employees are also considered part of a gig economy. However, in comparison to freelancers, part-time workers receive a paycheck as payment and the annual income is reported to the employee and IRS on a W-2 form by January 31 of the subsequent tax year.

As a gig worker, you may receive pay for your freelance work over third-party online platforms, like Venmo or PayPal. If you are paid more than $600 in a year, this income will be reported the IRS and you will be issued a 1099-K which will need to be reported on your tax return.

Examples of gig work include:

• Driving a vehicle for deliveries or booked rides
• Renting out property
• Shopping for someone or running errands for them in exchange for payment
• Selling goods or collectibles online
• Renting your personal equipment
• Providing any temporary, on-demand, creative or professional service or freelance work.

Sharing Economy, Self-Employment Income

Why do people freelance?

Particularly in younger Americans, freelance work is easier to come by. It can be seen as a short-term commitment for both workers and employers and can often be done online without have to relocate the worker. As such, freelance work is most popular among Millennials and Generation Z. Many choose it as a career choice where they base their work off of collecting various contracts or gigs while some only see it as a temporary way to make money.

In a sharing economy, goods and services are distributed differently in comparison to the traditional model of corporations hiring employees and selling products to consumers. Instead, consumers rent or share things like their cars, homes, and personal time to other individuals in a peer-to-peer manner. Sharing might include the following: renting, borrowing, lending, swapping, or bartering. Companies like Etsy, Doordash, Uber Eats, Airbnb, Flipkey, HouseTrip, HomeAway, Lyft, and Uber are just a few that are part of the new gig or sharing economy. As a gig worker, your tax situation is different than a traditional employed worker.

Keeping track of the complicated tax implications related contract income can get overwhelming. Begin tax planning for tax season with Taxpert.

Samples of Non Wage Income Types

Either prepare your tax return yourself and work with a Taxpert. Learn more about the various tax service options

Self-Employed or Employee

You are considered self-employed if you carry on a trade or business (not just a hobby) or you are in business for yourself whether it is full-time or part-time. A self employed person can be a sole proprietorship, an independent contractor, or a freelancer. You are considered self employed even if you are paid in cash and do not receive a 1099-MISC or 1099-NEC. Are you part of the gig or shared economy e.g UBER, Doordash, GritHub etc. and not sure how to report Income from that activity or how to estimate and file taxes?

See a comprehensive Small Business Tax Guide if you complete Schedule C. Use Taxpert.com to prepare your small business tax return and discuss your situation with one of our Taxperts. Self-Prepare but Not Alone!

Here is a quick look at how you are paid being self employed versus as an employee:

To be self-employed (business owner or independent contractor) depends on these three factors:

• Behavioral Control: How does the company or organization for which you work direct and control what work you do and how your work is done (using instructions, training, or other methods)? This may include what tools to use, what assistants to hire, or when to purchase supplies or services.
• Financial Control: Who has the right to direct and control the business and financial aspects of your job?
• Type of Relationship: How do you and the business relate based on your work or job? Are there contracts that describe the working relationship between you and the company? How do these documents characterize your role in the business?

Refer to the chart below to find out how these 3 factors determine if you are self-employed:

Independent Contractor

You are considered an independent contractor if the person or organization that pays you has the right to direct and control only the result of the work and not what work will be done or how it will be done.

• Examples of Independent Contractors: doctors, dentists, veterinarians, lawyers, accountants, public notaries, carpenters, electricians, plumbers, mechanics, stonemasons, home remodelers, housecleaners, lawn care providers, babysitters, news carriers, software developers, web designers, graphic artists, entertainers, guest speakers, truckers, cab drivers, farm workers, interpreters, project managers, hairstylists, salespeople, and freelance writers.
• Independent Contractor Income: compensation you receive for doing work or providing services as a self-employed individual, not as an employee. If you are self-employed and an independent contractor, your compensation is reported on Form 1099-MISC or Form 1099-NEC (along with rents, royalties, and other types of income). If you received a 1099 form instead of a W-2 , then the payer of your income did not consider you an employee and did not withhold federal income tax or Social Security and Medicare tax. A 1099-MISC or NEC means that you are classified as an independent contractor and independent contractors are self-employed.

Trade or Business

A trade or business, in general terms, is an activity carried out to make a profit. Even if you don't actually actually make a profit, you are still carrying out a trade or business as long as your motive is to make a profit and you make regular, ongoing efforts to further the interests of your business. A trade or business may be full-time or part-time and it may be carried out in addition to regular employment.

Hobby Income

A hobby is not a trade or business. If you carry on an activity that occasionally produces income, but your main purpose for pursuing the activity is not for profit, then you might be engaged in a hobby. Hobby income should be reported as other income on your tax return. If you itemize deductions, you can deduct hobby expenses up to the amount of your hobby income. See the tax return filing requirements to find out if your hobby income requires you to file a tax return.

Self-Employment and Taxes

As a self-employed individual, you are responsible for paying income taxes and self-employment taxes. Self-employment taxes are paid in addition to regular income taxes. Self-employment tax is made up of Social Security and Medicare taxes.

When you prepare your return on Taxpert.com, you will be asked if you own a business or have received a Form 1099-MISC or NEC - or a Schedule K-1. Based on the answers you provide, Taxpert.com will help you report your business income and expenses by providing the forms that you will need and asking for the information that needs to be reported on each form.

A Schedule SE - is used to calculate your self-employment tax. We will generate the Schedule SE for you. You can also adjust any of the amounts on your Schedule SE that are automatically calculated if this is necessary.

Qualified Business Income (or QBI) Deduction

The Qualified Business Income deduction (or QBI deduction) was created as a result of tax reform; it started for 2018 tax returns and will last through 2025. The QBI deduction allows you to deduct up to 20% of qualified business income if you are self-employed or are a small business owner. The deduction is allowed whether you itemize or not. The deductible amount depends on your total taxable income including wages, interest, and capital gains in addition to income generated by your business. The deduction limits are based on the income level and type of business.

For 2022, if the taxable income is greater than $170,050 ($340 if married filing jointly), then the type of business will affect the deduction amount. For 2021, it was $164,900 ($329,800 if filing jointly). Below this level, the deduction is 20% of taxable income. When you prepare and e-file your return on taxpert.com, you don't need to worry about income levels and how to calculate the QBI deduction as we will do all that for you.

In the table below, find the QBI Deduction phaseout threshold for 2022. For your filing status, your QBI Deduction will begin to phaseout at the AGI Amount before being reduced to 0% if your income reaches the phaseout maximum.

2021 QBI

Use the table below to file a previous year, 2021 Return - the figures below were adjusted for inflation for 2022 as they are each year.

Self-Employed Tax Deductions

There are many self-employed or small business tax deductions you can claim on your taxes as a self-employed person. This includes business expenses, such as office supplies, deductible business miles, and tools or equipment for your business. Below, find other deductible expenses to claim on your taxes.

Self Employed Health Insurance Premium

The self-employed health insurance premium - medical insurance, dental insurance, and qualified long-term care insurance - may be up to a 100% tax deduction on your 1040 tax return if you showed a profit for the year. As self employed, you can also deduct the health insurance premiums paid for your spouse, dependents, and children who are younger than 27 at the end of the tax year, even if the children aren’t your dependents. Your health insurance from the Marketplace is reported on Form 1095-A.

If you’re also eligible for the Premium Tax Credit, only the part of the premium you pay yourself is deductible. The Taxpert.com tax app will guide you through this when you prepare and eFile your taxes.

Let's say your annual health insurance premium was $5,000 and your profit for the year was $8,000: you could deduct 100% of your premium. With a $5,000 premium and a $4,000 profit, you could deduct $4,000. If your business showed a loss, you could not deduct any self-employed health premium payment.

For qualified long-term care insurance, there are limits based on age. You may be able to deduct the following from your annual premiums on your 2022 Return:

• Age 40 or younger: $450
• Age 41 - 50: $850
• Age 51 - 60: $1,690
• Age 61 - 70: $4,510
• Age 71 or older: $5,640.

See the 2021 limits below:

• Age 40 or younger: $430
• Age 41 - 50: $810
• Age 51 - 60: $1,630
• Age 61 - 70: $4,520
• Age 71 or older: $5,430.

Keep in mind, you can’t take the premium deduction if you were eligible for group insurance from your or your spouse’s employer. Included are reimbursements via a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The total amount of payments and reimbursements for a QSEHRA cannot exceed $5,300 or $10,700 for family coverage. In 2022, these amounts will be $5,450 and $11,050 for family coverage.

Self employed health insurance deduction will show on Line 16 on Schedule 1 of your 1040 tax return.

Self Employed Retirement Plans

See more about Retirement Plans for Small Business - SEP, SIMPLE and Qualified Plans.

Self-employed SEP, SIMPLE contributions will will show on Line 15 on Schedule 1 of your 1040 tax return.

Tax Credit

Estimated Taxes

If you are self-employed and you expect to owe $1,000 or more in taxes when you file your return, then the IRS requires you to make quarterly estimated tax payments. Estimated tax payments are used to pay income tax and self-employment tax. If you do not pay enough tax throughout the year via estimated tax payments to cover your tax liability, then you will be charged a penalty by the IRS. The tax penalty is calculated on your tax return, and added to the amount you owe or subtracted from your tax refund.

How to Pay Estimated Taxes

When you prepare and e-file your return on Taxpert.com and include your self employment income, we will calculate your quarterly estimated taxes that you should pay in the next tax year. We will also prepare vouchers you can use to mail in your payments to the IRS on the dates that they are due. You don't need to do any calculations, we do all the work for you.

You can also make your estimated tax payments electronically online. You can pay online using a credit card, debit card, or electronic funds withdrawal. If you make your payments online, you do not have to mail vouchers to the IRS. To pay online:

IRS Payment Portal

You can calculate and make estimated tax payments on your own using Form 1040-ES. Use the included worksheet to figure the amount of your estimated tax payments. You don't need to send this worksheet to the IRS, but you should keep it for your records. The booklet also contains four payment vouchers which you can use to make your quarterly payments if you are paying by check or money order. Fill out the appropriate voucher and enclose it in the envelope with your check or money order made out to "United States Treasury". You can find the mailing address to use on the "Where to File..." chart included in the 1040-ES booklet.

When to Pay Estimated Taxes

You may have to pay estimated income tax four times throughout the year (quarterly) because you do not have taxes withheld from your pay by an employer. The quarterly tax payment periods for the tax year are in the chart below:

If you are making an estimated tax payment by mail, your payment will be considered on time if it is postmarked on the due date. If the due date falls on a Saturday, Sunday, or legal holiday, you will be on time if your payment is made on the next business day. If you want or need to make additional payments than just the quarterly ones, make a copy of a payment voucher and mail it in with your additional payment or pay online. However, make sure that you pay enough by each due date to cover the preceding payment period.

Read this publication on retirement plans for small business or independent contractors.

More Information on Self-Employment Taxes:

• Independent Contractor and Taxes
• How to Prepare a Tax Return with a 1099 Form
• Employee Expenses and Job Deductions
• Home Office Deductions and Expenses.

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