Are You Self-Employed? Here’s How to Tell

self-employed tax

Many Americans find that working for themselves provides the flexibility and extra income that can be hard to find in a traditional job. Words like side gig, side hustle, freelance, independent contracting, and small business owner might describe what you do, but is it the same as being self-employed? Here are different work situations that the IRS considers self-employment.      

Contract workers    

When someone dictates how you must provide your services or products, you are, by definition, an employee. If your job is traditional, your employer withholds money for income taxes, Social Security, and Medicare from your paycheck. But many of today’s side gigs are contracted, and your “employer” doesn’t have to withhold anything as long as you provide them with your taxpayer ID number (SSN, EIN, etc.).  

Freelancers    

Photographers, graphic designers, writers, and other creatives commonly use the word freelance to describe their work. Just like the other self-employed categories, freelancers are eligible to claim deductions for supplies and home office space. Still, you’ll need to keep detailed records of your expenses and income. In addition, you’ll need a 1099-MISC from anyone who pays you more than $600.   

Drivers for Uber and Lyft    

Rideshare drivers for apps like Uber and Lyft are usually considered sole proprietors. Sole proprietors are more than just self-employed: they are small business owners. Other types of small businesses include S-Corps, LLCs, and partnerships. You are eligible for several valuable tax breaks as a rideshare driver and a small business owner.  

Learn more: Rideshare Tax Deductions.     

Independent distributors (Avon, Mary Kay, AdvoCare, LuLaRoe, etc.)    

Essential oils, candles, clothing, health supplements – the list of products sold through home parties continues to grow. Being a sales consultant is considered self-employment if you are treating it as a true business – meaning you are actively selling products in pursuit of a profit. If this is the case, you may be eligible for small business deductions.  

Learn more: 5 Tax Tips for Independent Consultants  

  

Your income depends on your specific skills     

Let’s say you’re not a contractor, but you’re not a freelancer, either. Instead, you provide a specific service that requires special training – athletes, performing artists, accountants, doctors, and dentists may fall into this category. In this case, you could be considered a specified service trade or business. Under the Tax Cuts and Jobs Act, you are eligible for the 20% pass-through business deduction, but your income is subject to thresholds.   

  

You work a full-time job and a part-time side gig     

Even if you only do your side hustle part-time – just a few hours a day, weeknights only, or a weekend here and there – you are still considered self-employed for tax purposes. When your full-time employer has you complete a Form W-4, you can (and should) include your extra income on the W-4. That way, your withholdings for income tax and FICA (Social Security and Medicare) will be calculated accurately, and you won’t be hit with a surprise tax bill when you file your return.    

Learn more: How to File Taxes with a W-2 and a 1099  

  

You receive a Form 1099    

One test to understand if you are self-employed or not is if you receive a 1099. If a client/employer paid you $600 or more for your services, they should complete a 1099-NEC and send it to you by Feb. 1 of the following year. They’ll send the same form to the IRS. If you are a contracted employee but still receive a 1099 from your employer, it means taxes have not been withheld from your pay. In this case, you could be expected to pay your own self-employment tax. You may even need to make estimated quarterly payments. This is common for people in work-from-home fields like medical transcriptionists, customer service representatives, or travel agents. There are other types of 1099s, too, like the 1099-K for rideshare drivers and Airbnb hosts. All versions of the form indicate that you are treated as self-employed for tax purposes and can deduct your business expenses.    

One test to understand if you are self-employed or not is if you receive a 1099. If a client/employer paid you $600 or more for your services, they should complete a 1099-NEC and send it to you by Feb. 1 of the following year. They’ll send the same form to the IRS.  

If you are a contracted employee, but still receive a 1099 from your employer, it means taxes have not been withheld from your pay. In this case, you could be expected to pay your own self-employment tax. You may even need to make estimated quarterly payments. This is common for people in work-from-home fields, like medical transcriptionists, customer service representatives, or travel agents. 

In addition, there are other types of 1099s, like the 1099-K for rideshare drivers and Airbnb hosts – who are often paid using a payment card. In prior years, you would only receive Form 1099-K if you received payments on a payment card exceeding $20,000 or 200 transactions. Now, if you are paid $600 or more through a payment card, it will be reported to you on Form 1099-K. All versions of the 1099 forms indicate that you are treated as self-employed for tax purposes and can most likely deduct some of your business expenses.    

  

You host on Airbnb (in some cases)    

Renting out your space through a hosting site like Airbnb, VRBO, or HomeAway is not considered self-employment unless you offer over-the-top services to your guests. Providing meals and/or cleaning services, for example, makes your rental look more like a traditional bed & breakfast. In this case, you would need to pay self-employment tax. But if you stick to the basic amenities, you would only need to pay income tax.  

Learn more: Airbnb Tax Advice Guide  

  

This article was last updated on 11/30/2022. 

 

Disclaimer:
This article is intended to provide general information to the public and does not provide personalized tax, investment, legal, or business advice. You should seek the assistance of a professional for advice on taxes, investments, and any other financial, legal, or business matter pertinent to your individual situation.

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