Identifying yourself as self-employed to the federal government determines how you will pay your income tax to the Internal Revenue Service. Claiming income as self-employed, or an independent contractor, means that taxes are not automatically withheld when you are paid. You receive the full amount and will have to report it to the IRS and pay taxes on it when you file your return. It also means that, if you are a business owner, you must determine whether to withhold taxes from payment to certain individuals who provide services to you.
In general, the IRS has rules to determine if a person is an employee or an independent contractor. If the company has the right to dictate the work and how it is to be completed, then, more than likely, you are an employee. Also, if financial aspects, such as how the worker is paid and the tools and supplies used, are controlled by the company, then you may not be considered self employed. If you receive benefits that an employee would deserve or you do not have a written contract, you may have to have your taxes withheld from your payments as an employee of the business. The IRS explains that the key to determining if an individual is self employed is the degree of control that the company has over the worker's performance of duties.
One way to qualify as self employed is to be the sole proprietor of a business. However, you must be running the business as more than a hobby. If your customer considers you an independent contractor and you make more than $600 from that client in one year, then you should receive a Form 1099 that reports the income. An employee receives a W-2, instead, that details the withholding amounts. Even if the client does not send you a 1099, you still must report the income on your tax return. You do not have to work full-time in your business as long as you are making an effort to gain a profit.
Partner or Member
The IRS considers partners of corporations or members of a limited liability company as self-employed. If you are in a trade or business to make money and you have formed a type of partnership, you may qualify as self employed. If you have a corporation or limited liability company and you are contracted with another company to perform a service, you will be considered self employed as long as you fall under the IRS rules.
If you want to be sure that you or someone who works for your company is self employed, complete IRS Form SS-8 to determine if income tax should be withheld. The IRS will review the information and make an official decision for you. This may be the safest avenue for some because if you misclassify an employee, you may have to pay withholding retroactive to the time that your professional relationship began.
The IRS states that, if you are classified as being self employed, then you must pay self-employment tax on your earnings. This tax is a Social Security and Medicare payment for those who are self employed. You also may be required to estimate your annual tax and send quarterly payments to the IRS or you can incur a penalty for non-payment.