Some people enjoy the flexibility of freelance work. Others take it on because well-paying traditional jobs can be hard to find.
Either way, taking care of taxes can be complicated and stressful for independent workers. In this two-part post, we will use a Q & A format to explain why this is and how to respond.
Who is considered an independent contractor?
The short answer is anyone who receives a 1099-MISC for non-employee earnings.
But it isn't only independent contractors who are considered self-employed for tax purposes. If you are in business for yourself, or as a member of a partnership, the IRS considers you to be self-employed.
Indeed, even if you have a regular job as an employee for which you receive a W-2, you can be self-employed as to a side job or jobs.
Why is it a such a hassle to handle self-employment taxes?
Because nothing gets withheld from your check. For traditional employees who get W-2s, employers withhold income taxes and make Social Security and Medicare contributions.
If you are an independent worker, you have to take care of all that yourself by making self-employment tax payments.
Is there an income threshold for having to pay self-employment tax?
Yes. The threshold is $400 in net earnings.
What expenses can you deduct as an independent worker?
The short answer is that you can deduct ordinary and necessary business expenses, such as license fees and home office expenses. It is of course important to distinguish between expenses that are for business and those that are personal. If you try to deduct personal expenses, you could invite a tax audit.
In part two of this post, we will look in more detail at the home office deduction.