Self-Employed, Independent Contractors, and Taxes
Learn about the Pandemic Unemployment Assistance (PUA) program and unemployment benefits for self employed taxpayers as a result of the second stimulus payment package. If you worked as a contractor for a federal agency but were unable to work due to facility closures and/or other restrictions, you might be able to receive reimbursement for paid leave as a result of the second stimulus program. Keep up to date with the third stimulus payment and how to claim it on your 2021 return via the Recovery Rebate Credit.
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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 1099-MISC or 1099-NEC 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 home office expenses 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.
Samples of Non Wage Income Types
The easiest and most accurate way to pay self employment taxes with your tax return is to start a free tax return on eFile.com. Based on your answers to the tax questions, we will determine whether or not you have to pay self employment taxes and will calculate the amounts. You can then pay them when you file your return and we will also generate estimated tax payment amounts and vouchers that you can use to pay your taxes throughout the year.
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 new gig or shared economy 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 eFile.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:
Employee
Taxes withheld via W-4 Form and paid with tax return if taxes are owed
Self-Employed Business Owner
Schedule K-1
Note: Files 1120 business tax return via Schedule K-1 if they have a corporation.
Taxes paid via quarterly estimated payments and paid with tax return if more taxes are owed.
Self-Employed Independent Contractor
Taxes paid via quarterly estimated payments and paid with tax return if taxes are owed
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:
Company or business controls the work you do and how the work is performed. You also receive training and extensive supervision. The Company has the right to direct and control all inancial aspects of the job. This includes the tools and equipment invested in, determine pricing and wages, and helps withhold tax from your pay.
Expected to be permanent (or at least relatively long-term). You are also given employee benefits (insurance, pension, paid vacation, and sick pay). The services you provide are a key aspect of the regular business of the company.
Self Employed Business Owner - Schedule K-1 (own a corporation, files 1120 business tax return via Schedule K-1)
Independent Contractor -
1099-MISC, 1099-NEC, or receipts
You have the right to direct and control the business and financial aspects of your job. You may also have
un-reimbursed business expenses, invest in the facilities, equipment, or tools used in performing your job, make your services available to the open market, set your own rate and prices for services, not have taxes withheld from your pay, or have the possibility of incurring a loss.
Services you provide are not a key aspect of the regular business of the company. The relationship may not be permanent and the company does not give you employee benefits.
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 eFile.com, you will be asked if you own a business or have received a Form 1099-MISC or NEC - eFileIT or a Schedule K-1 - eFileIT. Based on the answers you provide, eFile.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 - eFileIT - 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 2021, if the taxable income is greater than $164,900 ($329,800 if filing jointly), then the type of business will affect the deduction amount. Below this level, the deduction is 20% of taxable income. When you prepare and e-file your return on eFile.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 2021. 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.
Married Filing Joint
$329,800
$429,800
Married Filing Separately
$164,900
$214,900
2022 QBI
Use the table below to tax plan for 2022 - the figures below are adjusted for inflation from 2021.
Married Filing Joint
$340,100
$440,100
Married Filing Separately
$170,050
$220,050
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 a premium tax credit, only the part of the premium you pay yourself is deductible. The eFile.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 2021 Return:
- 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. See information on retirement and taxes.
Tax Credit
As a result of the COVID-19 crisis of 2020 - 2021, you might be able to claim the refundable tax credit for sick leave and family leave. Certain self-employed individuals are eligible for this credit if you were unable to work or had to care for family members due to the Coronavirus (COVID-19) Pandemic of 2020 - 2021. This tax credit is claimed via Form 7202. More details about the Tax Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals and Form 7202.
See other tax credits you may be eligible to claim on your tax return.
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 eFile.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 - FileIT. 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:
January 1 - March 31
April 15
June 1 - August 31
September 15
September 1 - December 31
January 15 of the following year
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:
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