Maybe you’ve been asked whether you’re “self-employed.” Perhaps you’ve seen the term in the legal documents or descriptions of a state or federal law, but you’re not certain what it refers to and what it means for you. Let’s look at what is self-employed.
What Does ‘Self-Employed’ Mean?
Self-employed individuals earn their living through their own work without being employees of a third party and/or as the shareholders (shareholders) in a company. There are many terms for “self-employed” that vary slightly.
IRS Definition
The IRS states that an individual is self-employed if they satisfy one of the following conditions:
- Anyone who operates an activity or trade through an independent contractor, sole proprietor, or as an independent contractor,
- A partner which is involved in the business or trade or
- Someone who is working for themselves, which includes part-time businesses.
This definition also includes the members (owners) of the limited liability company (LLC) as they are typically assessed by the IRS as sole proprietors (single-member LLCs) or as partners in the form of a partnership (multiple-member LLCs).
Benefits for Self-Employed People
To be used in the CARES Act (2022) and the Families First Coronavirus Response Act (2022), “self-employed” is a person that “regularly carries on any trade or business,” which is a broad definition. (Note that it doesn’t mention “full-time,” so it could also include part-time businesses.)
For instance, the definition of the Paycheck Protection Program requires that the worker be “under a sole proprietorship or as an independent contractor” or as an “eligible self-employed individual.”
3 Coronavirus Benefits for Self-Employed Individuals
It is the Paycheck Protection Plan (PPP) provides an SBA loan program designed for companies that agree to hire or hire employees. The program is also accessible to self-employed individuals. The second PPP loan round was made available to first-time applicants as well as those who have applied before on the 11th of January 2021. The new options for loan options are available now.
The money must be utilized for payroll purposes However, it can be used for rent, mortgage interest, or utilities. It is necessary to apply for the funds via a bank or another lender.
Paid sick leave and family leaves tax creditsare accessible to self-employed people who are unable to work or must provide care for a family member or child because of COVID-19-related reasons. These tax credits are calculated on the amount of time off working and can extend to 10 days, with an amount of a maximum of one day. Tax credits can be used to offset the credit to offset self-employment tax for 2022 If you’re in need of to use the funds earlier you can take it by cutting down the monthly estimated tax payment.
Learn more about these benefits as well as other coronavirus relief for small-sized businesses alternatives.
How can you defer tax payments from tax credits?
As stated above You can delay (delay the payment of) 50 percent of the tax due on the Social Security part of your self-employment tax, which is due on March 27th, 2020 until December 31st, 2020. The amount deferred was determined by the amount of your income during that calendar year.
Unemployment Tax Benefits During Coronavirus
It is the Pandemic Employment Assistance (PUA) program that is included in the CARES Act extends unemployment benefits for self-employed people. If you’re self-employed and are capable of and willing to work and have been affected by COVID-19-related issues, you could qualify for unemployment assistance. This program of unemployment assistance will end on July 31st, 2021.
The unemployment benefit programs are managed by states individually and the federal government provides them with additional money to help with this situation. For more information and to apply, call your state’s unemployment department. You may get unemployment benefits or the Paycheck Protection Program loan, however, you cannot receive both.
Types of Businesses Owners Who Are Self-Employed
Self-employed means that you run your own business, however, the company can be set up in many different ways. These types of businesses are run by self-employed business owners:
Sold-proprietorship companies have just one owner.
Partners in the form of a partnership take part in the ownership of a company. They oversee the company and share the gains and losses.
The owners (members) in limited liability corporations (LLCs) may also work for themselves. The owner of a one-owner LLC single-owner LLC operates the business in the same manner as a sole proprietor, however, with the added benefit of the protection of liability. Owners of a multi-owner LLC manage their business in the same manner as partners in the form of a partnership.
S-corporation proprietors are not self-employed in the same manner as partners in the partnership are. They do not need to be taxed as self-employed on their portion of the profits of the corporation. S corporation owners are entitled to a part in the distribution of the profits of the business like partners in the partnership. If the S company’s owner is also employed in the company in the capacity of an employee they’re paid a wage for their job. 8
Being Self-Employed and Self-Employment Taxes
No matter what you call yourself, if self-employed as an independent contractor as well as a sole proprietor participant in a joint venture as well as an LLC participant, then you have to pay self-employment tax (Social Social Security, and Medicare).
Self-employed people pay self-employment tax every year if their annual self-employment earnings are at least $400. The tax rate is 15.3 percent (12.4 percent on Social Security and 2.9% for Medicare) on the annual net income earned by the business. Business owners with higher incomes have to pay the additional 2.9 percent Medicare tax however, the Social Security part is not capped each year. Self-employment tax is calculated and then added to the tax return of the individual as a tax liability.
How Do Self-Employed Individuals Pay Income Taxes?
If you’re self-employed, you have to pay taxes on income when you file your own tax form (called “pass-through taxes”). If you are the sole owner (or an LLC with a single member) and you are a single-member LLC, you need to fill out Form C and pay self-employment tax according to the net earnings of the business.
For those who are partners in partnerships, participants of multi-member LLCs, and S corporate owners, the process to determine your income tax is a little more complex. You first need to complete and file your tax return for the business, followed by you must file a Form K-1 that reveals your portion of the earnings of the business.
