Freelancers, contractors or other consultants, even if they work part-time on the side, can often have a more complex tax situation than the standard employee.
You are an independent contractor in the eyes of the IRS if you receive a Form 1099-MISC. This form documents your earning from a specific client, as opposed to a standard employee's W-2. The IRS considers anyone who receives a 1099-MISC to be self-employed, whether as a freelance writer or an Uber driver.
The payer is not required to include benefits, Social Security contributions, or income tax withholdings, which means you may make more money than a salaried employee.
However, because the payer doesn't provide these things, you'll be required to handle it yourself. You may be able to deduct some relevant costs of developing, maintaining and growing your business.
Independent contractors have to be diligent in their record keeping - ensuring business expenses and personal expenses are always kept separate.
Copies of whatever Form 1099-MISC you receive are also sent to the IRS by the client who paid you. Throughout the year, you'll be expected to pay self-employment taxes, usually in quarterly installments. These taxes cover 15.3% of your net profit toward Social Security and Medicare, along with your share of income taxes.
To report your income to the IRS, you'll use a Schedule C. You also claim expenses on this form. Any net earnings greater than $400 require the filing of a Schedule SE to calculate self-employment tax.
Net profit relates to the amount you were paid for goods and services, after you've taken all your eligible business deductions.