The self-employment invoice can be used by any freelancer, entrepreneur, or contractor that is considered a “1099 employee.” A self-employed individual is responsible for the payment of their own withholding taxes, and the amount paid must align with what the business enters on IRS Form 1099, which is submitted at the end of the fiscal year (if the amount is over $600 per Internal Revenue Code § 6041(a)).
What is Self Employed?
A person who is self-employed is their own boss. Instead of having a direct employer, self-employed individuals own a business or work for clients to complete a task. Self-employed persons also refer to themselves as freelancers, independent contractors, free agents, and sole proprietors.
Some business owners subject themselves to a payroll paid by their own company, which may give off the impression that they are employed when, in fact, they are still self-employed. The way in which an individual pays taxes is the clearest indicating factor that will deem their employment status.
A person is self-employed if any of the following are true:
- An individual owns a business as a sole proprietor or works for themselves as an independent contractor.
- An individual is a member of a partnership that’s involved in a trade or business.
- An individual is in business for themselves (however that might be).
Self Employment Tax
There is no specific self-employment tax — that is, an individual is not taxed an extra or special tax simply because they are self-employed. The norm is that the more money a person makes, the more they will pay in taxes depending on the tax bracket they fall into and in which state they reside. Individuals that are self-employed have the responsibility to pay an annual tax return while also paying estimated quarterly taxes.
Self Employment Tax Form – Those that own a business are required to file Schedule C (Form 1040) to report profit and losses for a sole proprietorship. Businesses with expenses not exceeding $5,000 may file Schedule C-EZ instead. Lastly, a self-employed individual must file Schedule SE (Form 1040) and Self-Employment Tax to report Social Security and Medicare taxes.
Tax time for self-employed individuals can be exceedingly difficult, which is why many choose to hire a tax consultant or CPA.
Tax Deductions – Deductions are calculated by deducting business expenses from the gross income of your company.
Self Employed Health Insurance
There is insurance available to those who are self-employed (could be a freelancer, consultant, independent contractor, or another self-employed worker) that do not have any employees. If a self-employed person has even one employee, they will need to explore health insurance options for a small business.