There’s a lot of confusion about the definition of independent contractor when filing tax returns. According to the IRS, “An individual is an independent contractor if the payer has the right to direct the result of work, but not how it’s done or how it will be done.” The definition by the IRS doesn’t necessarily provide clarity for tax filers and serves to create more confusion.
Independent contractors are considered to be self-employed. That means their earnings are subject to taxes, and they’ll pay Social Security and Medicare related taxes. Individuals that operate a part-time business are also considered to be self-employed, along with those that receive money in connection with hobbies and similar activities.
Net earnings of $400 or more from self-employment activity must be reported or if they meet other filing requirements as determined by the IRS. The IRS tax form 1040 or 1040-SR will be needed, along with Schedule C for losses. A 1099-NEC should be obtained for non-employee compensation.
An independent contractor, as defined by the IRS, is especially important for the increasing number of gig workers. Income taxes aren’t withheld from their earnings and the full tax burden falls on them at tax time since they’re considered self-employed. The same rules and forms apply to gig workers as those that are self-employed.
Consider a Professional
The tax laws governing the self-employed can be extremely difficult to navigate. While most online tax services may be adequate for completing filing requirements and providing the needed forms, individuals that are considered self-employed can benefit from a professional tax preparer or a tax attorney.
The professionals will know exactly what forms are needed for each individual situation, along with any related deductions. Whether an individual is operating a full-time or part-time business in which they’re paid for their services, they’re considered self-employed for the purposes of the IRS.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!