Taxes When You're Self-Employed

Updated: Jan 17, 2020

Doing your tax return is hard enough when you are a regular employee entering income from the W-2 you get from your employer. When you are self-employed, as many more of us are today, taxes can be even harder to figure out. You don’t want to end up with a surprise tax bill because you didn’t realize that part of your hard-earned money was taxable.

What are the basic things you need to understand about taxes when you work for yourself? First, if you’re not sure that you are actually considered an independent contractor, our Investopedia article can help you confirm that status. Once you’re sure, follow these steps to be ready when tax season rolls around.

Classify Yourself

When you’re self-employed, you can fall into one of several tax categories:

  • Self-employed consultant

  • Sole proprietor

  • LLC member (LLC owners are called members)

  • S-Corp owner

  • Corporation owner

Let’s break these down. If you pick up occasional work here and there – like if you help out with events once in a while, getting paid $500 a crack – but you don’t really have a “business,” you’re going to get a 1099-MISC showing what that company paid you that year. The income reported on the 1099-MISC will go to the IRS with your Social Security number attached to it just as income on a W-2 gets sent. In that case, you’ll report that income on line 21 of Schedule 1 of your Form 1040. In this case, you’re not really “in business” but are a self-employed consultant. In this case, you don’t have a special tax number for your business; you just use your Social Security number.

If you have expenses related to that income, and you consider yourself to be in business, then you are a sole proprietor. In this case, you’ll put your business income and deductions on Form Schedule C that goes along with your Form 1040. In this case, you don’t need to have a special tax number for your business; you can just use your Social Security number. However, as a sole proprietor, you may want to