What Does It Mean to Be Self-Employed?

September 28, 2023

Being self-employed can be an exciting and liberating career choice. However, it also comes with its fair share of responsibilities, especially when it comes to dealing with the IRS. So let's explore what it means to be self-employed and discuss the important considerations that self-employed individuals need to keep in mind when it comes to their taxes.

What It Means to Be Self-Employed

Being self-employed means that you work for yourself and are responsible for running your own business. This can include freelancing, starting a small business, or working as an independent contractor.

One of the main benefits of self-employment is the freedom and flexibility it offers. You have the ability to set your own schedule, choose the projects you want to work on and have control over your work environment.

However, being self-employed also comes with its own set of challenges and risks. The biggest one, of course, is that it's all on you. You are solely responsible for finding clients and generating income and need to be proactive in marketing your services and networking to build a client base. Also, there's the reality that your income streams may ebb and flow over time. Are you someone who can handle periods of financial uncertainty? If so, the self-employed life might be a hard one to live. 

But for many, the pros more than outweigh the cons. Ultimately, being self-employed offers many advantages, such as independence, flexibility, and potential financial rewards. While there are responsibilities involved, with proper planning and attention to detail, being self-employed can be a fulfilling career path worth pursuing.

Does the IRS Consider You to Be Self-Employed?

The IRS is a crucial aspect of being self-employed. As a self-employed individual, you are responsible for managing your own taxes and making sure you comply with the rules and regulations set by the IRS. This includes keeping accurate records of your income and expenses, filing self-employment tax returns, and paying estimated taxes throughout the year.

One important consideration is understanding the difference between an employee and a self-employed individual in the eyes of the IRS. Employees have taxes withheld from their paychecks by their employers, while self-employed individuals must calculate and pay their own taxes.

To be considered self-employed by the IRS, you must meet certain criteria. The IRS defines self-employment as earning income through a trade or business that you operate as a sole proprietor, an independent contractor, or a member of a partnership. If you meet any of these qualifications, you are considered self-employed for tax purposes.

To determine if you meet the criteria for self-employment, the IRS looks at factors such as the degree of control and independence you have over your work, the nature of your relationship with clients or customers, and whether or not you have the opportunity for profit or loss.

It's important to note that even if you only have a part-time business or earn self-employment income in addition to your regular employment income, you are still considered self-employed and must report and pay taxes on that income. You'll typically do this via a Schedule C (Form 1040) and Schedule SE.

Tax Deductions Self-Employed People Should Know About

As a self-employed individual, there are several tax deductions that you may be eligible to claim. It's important to keep accurate records and document your expenses throughout the year to ensure that you can maximize your deductions. Here are some common deductions that self-employed individuals can claim:

1. Home Office Deduction: If you have a dedicated space in your home that is used exclusively for your business, you may be able to deduct a portion of your home expenses, such as mortgage or rent, utilities, and insurance.

2. Business Expenses: Any expenses that are necessary and ordinary for your business can be deducted. This can include things like office supplies, equipment, software, professional fees, advertising costs, and business-related travel expenses.

3. Self-Employment Health Insurance Deduction: If you pay for your own health insurance, you may be able to deduct the premiums as a self-employed health insurance deduction. This deduction is taken on Form 1040, Schedule 1.

4. Self-Employment Retirement Contributions: Self-employed individuals can contribute to retirement plans such as SEP IRAs, SIMPLE IRAs, or solo 401(k)s. Contributions to these plans are tax-deductible and can help you save for retirement while reducing your taxable income.

5. Vehicle Expenses: If you use your vehicle for business purposes, you can deduct the expenses related to its use. This can include mileage, fuel costs, repairs, and insurance. It's important to keep detailed records of your business mileage to support your deductions.

6. Self-Employment Taxes: As discussed earlier, self-employed individuals are responsible for paying their own Social Security and Medicare taxes. However, you can deduct the employer portion of these taxes as a business expense.

7. NEW! FFCRA:  In response to the COVID-19 pandemic, the Families First Coronavirus Response Act (FFCRA) was enacted to provide relief to individuals affected by the virus. This act includes provisions that allow self-employed individuals to receive COVID-19-related relief, such as paid sick leave and expanded family and medical leave credits. These provisions can provide financial assistance to self-employed individuals who are unable to work due to COVID-19-related reasons. 

Adesso can help you determine your FFCRA eligibility and get you the tax credits you deserve! Click here to take our 3-minute free pre-qualification quiz to see if your business qualifies for COVID-19 tax relief. 

Tips For Managing Taxes As A Self-Employed Individual

Managing taxes when you’re running your own business can get complicated quickly, but there are several tips that can help make the process smoother. Here are some tips for managing taxes as a self-employed individual:

1. Hire a tax professional or use tax software: Self-employment taxes can be complicated, so it's often beneficial to seek the help of a tax professional or use tax software specifically designed for self-employed individuals, like Adesso360. These resources can help ensure that you're maximizing your deductions and filing your taxes correctly.

2. Organize your financial records: Keeping accurate and organized financial records is crucial for managing your taxes. This includes tracking your income, expenses, and any business-related transactions. Consider using accounting software or online tools to help streamline this process.

3. Stay on top of tax obligations: As a self-employed individual, you'll need to make estimated tax payments throughout the year to cover your income and self-employment taxes. It's important to understand your tax obligations and deadlines to avoid penalties and interest charges. Set reminders and create a schedule to ensure that you're making timely payments.

4. Plan and budget for tax payments: Since self-employed individuals are responsible for paying their own taxes, it's important to plan and budget for these payments throughout the year. Set aside a portion of your income each month to cover your tax liabilities. This will help prevent any financial strain when it comes time to pay your taxes.

5. Keep up with tax law changes: Tax laws and regulations can change frequently, so it's important to stay informed about any updates that may affect your self-employment taxes. Consider subscribing to IRS updates or consulting with a tax professional to ensure that you're aware of any changes that may impact your tax obligations.

The bottom line

Being self-employed can be a rewarding and fulfilling career choice, but it also requires careful attention to tax obligations. By understanding the intricacies of self-employment and staying informed about IRS regulations, self-employed individuals can navigate their tax responsibilities successfully and enjoy the benefits of being their own boss.

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