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

self-employed tax

The information in this article is up to date through tax year 2020 (taxes filed in 2021).

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 what they do. Just like the other self-employed categories, freelancers are eligible to claim deductions for supplies and home office space, but you’ll need to keep very detailed records of your expenses and income. And 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. As a rideshare driver and a small business owner, you are eligible for several important tax breaks.

Read also: Rideshare Tax Deductions.   

Independent distributors (i.e. Avon, Mary Kay, AdvoCare, LulaRoe, etc.)  

Essential oils, candles, clothing, health supplements… the list of products that are sold through home parties continues to grow. Being a sales consultant is considered self-employment if you are treating it as a true business. Also note that you are eligible to take small business deductions if you are actively selling products in pursuit of a profit.

Read also: 5 Tax Tips for Independent Consultants

Your income depends on your specific skills    

This includes professionals like athletes, performing artists, accountants, doctors, and dentists.

You’re not really a contractor, but you’re not freelance either. You provide a specific service that required special training. 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. Learn about the effects of tax reform on your self-employed deductions.  

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

Even if you only do your side hustle on a part-time basis – just a few hours a day, weeknights only, or a weekend here and there – you are still self-employed for tax purposes. If your full-time employer has you complete a Form W-4, you can (and should) include your extra income on the W-4 as well. 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.  

Read also: How to File Taxes with a W-2 and a 1099

You receive a Form 1099  

One test to see if you are self-employed or not is to see if you receive a 1099. If you were paid $600 or more from a client/employer for your services, they should complete a 1099-NEC and send it to you by Feb. 1 the following year. They’ll send the same form to the IRS. If you are a contracted employee but you 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 pay quarterly estimated payments. This is common for people in work-from-home fields like a medical transcriptionist, customer service representative, or travel agent. 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 you can deduct 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.

Read also: Airbnb Tax Advice Guide

 

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