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.

Self-Employed

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.

Gig Workers

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!

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People that are self-employed typically pay a self-employment tax, income tax, and are required to file quarterly. Estimated taxes are similar to the Medicare and Social Security taxes that are withheld from a person’s paycheck. The goal for the self-employed is to subtract business expenses from business income to determine estimated taxes.

If expenses are less than income, the difference becomes net profit and part of the income. The reverse is also true. If expenses are more than income, the difference is the net loss. Net earnings of more than $400 requires the filing of self-employment taxes and the individual may also have to file an income tax return.

Since there’s no employer taking Medicare and Social Security taxes from a paycheck, those that are self-employed have to estimate their tax liability. Specialized forms and worksheets will be required and it’s at this point that most individuals hire a tax professional. They will know when the client needs to file and they have the advanced software needed for the complex computations. They can also e-file.

Business Structure

When an individual launches a business, they must decide what type of business structure the enterprise will follow to ensure they’re estimating the correct level of taxation. People most commonly establish a sole proprietorship, corporation, partnership or S corporation. They may also choose to operate as a limited liability company (LLC), which is a relatively new type of entity that most states deemed allowable in the 1990s.

Joint Venture

When spouses form a business venture, it’s considered a joint venture for tax purposes and the rules are slightly different. They have the option, if they’re the only employees, to elect to file taxes individually rather than as a partnership.

Penalties

Business owners will find that they’re charged a penalty if they don’t pay enough taxes through estimated tax payments if they receive other income. Those sources can include alimony, dividends and capital gains, and prizes and awards. It’s just one of the reasons why it’s easier and more efficient to hire a tax professional.

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!

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Over 55 million people are engaged in side hustles. Commonly known as the gig economy in today’s vernacular, people are turning to work they can do on their own terms to earn extra cash in addition to their regular jobs. Side hustles run the gamut from making handcrafts and freelance writing to dog walking and driving for ride-share companies.

The activities can generate significant funds to help people get out of debt, finance college, or save for retirement. It allows individuals to follow their passion, provides a measure of financial freedom, and allows for extreme flexibility on the part of the individual. What most people don’t realize is that they’ll also be responsible for paying taxes on their side hustle.

However, the IRS has an entirely different set of rules for people in the gig economy. If an individual makes more than $600 in a calendar year, they’ll have to report the money as earnings on their tax returns. The IRS then classifies individuals as self-employed and subject to a 15.3 percent self-employment tax.

To offset that, individuals will need to take every deduction possible and make sure they have enough money in savings to pay the taxes the IRS will impose. Failing to plan ahead will leave side hustlers with a large tax bill they may be ill-equipped to pay, which can set an entirely new set of problems in motion.

The first thing that side hustlers learn is to save every receipt. Individuals working from home can claim a portion of their home as office space. Expenses for driving to trade shows, assignments, and even internet services can be deducted, along with laptops, software and similar expenses for conducting the side job.

Performing work for others via online platforms is one of the most popular ways that people are engaging in side hustles. It’s important to know that these gig platforms typically don’t issue a form 1099 for taxes at all, and some only do if a certain income level is reached. Individuals will need to learn how to keep accurate records of expenses and income on their own.

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!

Contact Us Today