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Self Employed Vs. Employee Part II

Freelance onboarding of W-9

A self-employed individual is required to file an income tax return if:

  • Their net earnings from the business were $400 or more during the tax year. If the earnings were less than $400, they will not be required to file a return. However, if the taxpayer meets any other Form 1040 filing requirement, then they must file.
  • They had church employee income of $108.28 or more.

 

Self-employed taxpayers must also use Form-1040 ES in order to determine whether or not they need to file quarterly estimated tax payments.

Based on the worksheet on the form, the taxpayer will know if they need to submit quarterly payments. If it is the taxpayer’s first year being self-employed, then they will need to estimate their earnings in order to submit their quarterly payments. Employees can generally just used Form 1040 depending on their tax situation.

Employers must withhold federal income tax from the employees’ wages. Depending on how much was withheld, the employee will either owe or expect a refund after the tax return is filed.   

Self-employed individuals can also use the Home Office deduction if they use part of their home for their business. Self-employed taxpayers can deduct expenses for the business use in their home.

Which type is preferred? There are pros and cons to each. Employees’ benefits generally include health insurance, retirement, and a 401k. Self-employed taxpayers are not given these benefits; they must enroll in them individually. Self-employed taxpayers can take a deduction for their health insurance expenses for themselves, their spouse, and dependents. Employees also don’t have to worry about submitting Social Security or Medicare to the IRS since their employers already withhold and remit those payments to the IRS. Employees are provided with unemployment and workers’ compensation insurance. However, self-employed individuals are allowed more tax deductions since they usually work from home. The ideal situation (employed vs. self-employed) depends on the taxpayer and their life situation/career objectives.



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