What the law says - Self-employed workers (2024)

FAQs

How does the IRS determine if someone is an independent contractor or an employee? ›

Pay basis: If you pay a worker on an hourly, weekly, or monthly basis, the IRS will consider it a sign the worker is your employee. An independent is generally paid by the job, project, assignment, etc., or receives a commission or similar fee.

Who is self-employed? Generally, you are self-employed if any of the following apply to you. You carry on a trade or business as a sole proprietor or an independent contractor. You are a member of a partnership that carries on a trade or business.

A self-employed person isn't tied to a specific employer. They more or less decide when they'll work and when they won't. As such, a self-employed person is their own boss, which comes with certain tax liabilities.

Becoming an independent contractor is one of the many ways to be classified as self-employed. By definition, an independent contractor provides work or services on a contractual basis, whereas, self-employment is simply the act of earning money without operating within an employee-employer relationship.

The law further states that independent contractor status is evidenced if the worker: (1) has a substantial investment in the business other than personal services, (2) purports to be in business for himself or herself, (3) receives compensation by project rather than by time, (4) has control over the time and place ...

Whether a worker is an employee or an independent contractor under the FLSA is determined by looking at the economic realities of the worker's relationship with the employer. If the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee.

If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our self-employed individuals tax center.

Self-employment tax applies to self-employed people who earned more than $400 during the year. The self-employment tax rate — a combination of Social Security and Medicare taxes — is 15.3% for 2023 and 2024. You'll use Schedule C to calculate net earnings and Schedule SE to calculate how much tax you owe.

Key Takeaways

Self-employed workers are in business for themselves as sole proprietors or independent contractors. Employees work for an organization, and the employer provides mandatory benefits, may offer additional optional benefits, and withholds taxes.

Nevertheless, independent contractors are usually responsible for paying the Self-Employment Tax and income tax. With that in mind, it's best practice to save about 25–30% of your self-employed income to pay for taxes. And, remember, the more deductions you find, the less you'll have to pay.

Does getting a 1099 mean I am self-employed? ›

If payment for services you provided is listed on Form 1099-NEC, Nonemployee Compensation, the payer is treating you as a self-employed worker, also referred to as an independent contractor. You don't necessarily have to have a business for payments for your services to be reported on Form 1099-NEC.

Use Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment. The Social Security Administration uses the information from Schedule SE to figure your benefits under the social security program.

Self-employed people are those who own their own businesses and work for themselves. According to the IRS, you are self-employed if you act as a sole proprietor or independent contractor, or if you own an unincorporated business.

When the principal has the "right of control," the worker will be an employee even if the principal never actually exercises the control. If the principal does not have the right of control, the worker will generally be an independent contractor.

Provision of tools and materials.

Workers who use company-provided equipment, tools, and materials to perform their work are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor classification.

In analyzing Prong A of the ABC test, the California Supreme Court in Dynamex explained: A worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee.

There are three different tests commonly used to determine if a worker is an employee or independent contractor: The common law agency test. The economic realities test. The IRS 20-factor analysis.