After being laid off from my regular job of 23 years I find myself scrounging to bring in some income and maintain some kind of a reasonable standard of living. In that vein, I’ve found some contract work where I’ll be paid hourly and will receive a 1099 at the end of the year. I am not asking for tax advice but just trying to understand where to start when reviewing IRS publications. My question is: am I officially self-employed? I realize that I must pay “self-employment taxes” (I presume this is the other half of the payroll taxes previously paid by my employer), but everywhere I see the IRS referring to self-employed, such as:
Would I be included in this description?
Any tips for someone in my situation?
I am not one to usually say these things but you need to have a chat with an accountant. You are probably going to have to pay estimated quarterly taxes if I read your situation right. There can be a huge downside to not handling this correctly like learning that you owe thousands of dollars more at the end of the year. Being an independent contractor also means that you can probably deduct things that you couldn’t as an employee and you need someone to teach you about that.
Your situation is pretty common but it is very easy to get burned or not maximize your tax advantages.
You have to pay self-employment tax if you earn over the minimum (IIRC, $400) from sources that are not paying Social Security.
You don’t have to be self-employed full time to owe the tax. If you have a job, but sell a novel for $3000, that $3000 is subject to the tax.
All the money earned can be treated as self-employment income and qualifies you for the various self-employment tax breaks. They only apply to this income and not to any regular employment. Again, in my example, the $3000 is the limit to what is eligible for the tax breaks.
You should fill out a Schedule C, which lets you take deductions even if you aren’t otherwise eligible to itemize. For instance, you can deduct costs of supplies, postage, etc., as long as it was used to earn income. Keep those sort of purchases separate in case the IRS asks.
Thanks. I plan to fill out a Schedule C and file quarterly taxes. I’m starting to keep records of expenses that might be deductable.
I am not likely to go to an accountant. I have no extra money for that and I will work to educate myself on the issues as best as I can.
You are absolutely “self employed.” You are responsible for your SS taxes. As a benefit, you can deduct equipment, software, education, etc. that are business expenses. You can also deduct milage in some cases (but this is way more complicated than one would think).
Dude, 1099 work is awesome once you set it up right. Darned near everything is deductible. You just need to make more than your expenses and you’re golden (I’d say that that’s applicable to lots of things). If (big if) you have a single room dedicated to work that has no other function, you can usually take the ratio of that space’s square footage against the sq feet of your house, and deduct that percent off your heat, electric, etc.
You can hire your spouse to help in the business, and pay her a salary. Your kids, too. You are then required to provide health insurance for them and a retirement plan for them, and you take all of that that off your taxes as well. Oh and you need a retirement plan as well (a SEP) which you contribute to pre-tax. Yes, this is all legal. Its probably an onerous amount of paperwork the first time you do it, but it saves you a ton of money that you have to spend anyway. It may be worth it to pay an accountant the first year just to get a method going for your filings.
I did 1099 for four years, and it was great – work when you want, or work more and make more (that was my method). My wife was my assistant (at a token salary, but she had good benefits 
).
Good luck!
ETA: YMMV, I live in CA and some of this may not apply to you.
You will also need to chop off at least 30% of every payment you receive and stick it in a separate savings account (I call mine my “Uncle Sam” account) so you have it for those quarterly payments. Early in my freelancing days I tried just mentally estimating how much I’d owe. Bad idea. Chop off that 30% and don’t touch it until it’s time to pay the estimate.