Many Americans find that self-employment 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.
What does it mean to be self-employed?
The IRS generally considers you self-employed if you carry on a trade or business and do not have an employee/employer relationship. In other words, you work for yourself rather than earning wages as an employee for a person or company.
Being self-employed can change your tax situation. Instead of having income taxes and payroll taxes withheld from a paycheck, you’re typically responsible for reporting your business income and expenses on your tax return and paying any taxes owed directly. Self-employed workers may also need to pay self-employment tax, which covers Social Security and Medicare taxes, and may be required to make estimated tax payments throughout the year if their tax liability is expected to exceed $1,000. At the same time, self-employed individuals can often claim business-related tax deductions that employees generally cannot take, which may help reduce their taxable income.
Who is considered self-employed?
Many types of workers may be considered self-employed for tax purposes. The following groups of people are most likely self-employed:
- Independent contractors
- Freelancers
- Consultants
- Gig workers
- Small business owners
The key factor is generally whether you are in business for yourself and earn income from providing goods or services independently rather than working as an employee.
Common examples of self-employed jobs include:
- Freelance writers, designers, and developers
- Rideshare and delivery drivers
- Online sellers and sole proprietors
- Real estate agents
- Tradespeople with their own business
- Partners in a business partnership
Even if self-employment is only a side job or a source of part-time income, you may still be considered self-employed for tax purposes and have additional tax filing and payment responsibilities.
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.
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.
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. 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 withholding 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.
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.
Also, there are other types of 1099s, like the 1099-K for rideshare drivers and Airbnb hosts – who are often paid using a payment card or third-party payment apps. For tax year 2023 and prior, you would only receive Form 1099-K if you received payments on a payment card exceeding $20,000 or 200 transactions.
Starting in 2024, 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.
Who’s considered an employee?
Workers who are not self-employed and instead perform services under the direction of an employer are generally considered employees. In most cases, employees work for a company or organization that determines when, where, and how the work is performed. Employees typically receive a Form W-2 reporting their wages and may be eligible for employer-provided benefits such as health insurance, retirement plans, paid time off, and unemployment benefits. They also have federal and state income taxes, Social Security, and Medicare taxes withheld from each paycheck by their employer.
Common examples of employees include:
- Full-time and part-time staff members
- Administrative workers
- Retail and restaurant employees
- Teachers employed by a school district
- Healthcare workers employed by a hospital or medical practice
- Corporate employees
- Government employees
