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Small Business vs. Self-Employment: Filing Your Taxes is Different for Both...& Here’s Why

Am I self-employed?

Am I an independent contractor?

Am I a small business owner?

They all sound like the same thing in essence, right?

"I provide a good or a service and I get paid for it."

Self-employed individuals can act as small businesses but are usually a "one-person show" BUT, they can also be an independent contractor, dealing with multiple clients on various projects.

It definitely gets confusing. But surprisingly, there are important differences that you should pay attention to, especially when it comes time to file your taxes. Depending on the structure of your business, it's imperative to know the key differences that sets these entities apart and the tax requirements of each.

What Does It Mean to be Self-Employed?

Self-employment can be broken down into three categories:

  • Sole proprietorship: A "one-person business," where you're solely responsible for everything related to your business

  • Partnership: Similar to a sole proprietorship, with two or more people conducting business together

  • Independent contractor: Often referred to as "freelancers" and typically work on a contract-basis

Self-employed individuals often have many clients, which can translate to multiple 1099 forms. And in some cases, you won’t receive a 1099 — which can make things confusing because you’ll still need to report the earned income.

Your tax obligations should be incorporated into the prices that you set. Since freelancers are considered self-employed, they are also subject to self-employment tax, assuming earned income does not exceed $600 per year. Unlike W-2 employees, self-employed individuals do not have taxes, such as Medicare and Social Security tax, automatically deducted from their paychecks - so it is ultimately their responsibility to keep track of what they owe and pay it on time. The key difference between a small business and a self-employed individual is that the self-employed must pay self-employment tax as well as file a tax return each year.

What Does It Mean to be a Small Business Owner (SBO)?

The business is a separate entity from its owner, meaning there are different legal obligations and financial responsibilities for small business owners. In comparison to a self-employed individual, filing taxes as a small business can get a bit more complicated because each type of business has its own set of requirements. The business tax that you pay depends on your business structure, with a Limited Liability Corporation (LLC) being one of the most common business types. Once you hire employees, it's your responsibility to withhold your employees' federal, state, and local taxes (if applicable). Hiring an independent contractor is rather straightforward and does not require any tax withholding. As a small business owner, it is your responsibility to ensure that you are complying with the tax laws that your business structure calls for.

Regardless of your business structure, be sure to keep track of your expenses year-round so that you can be prepared come tax season.

If you have questions and/or need help defining your business structure, Tax Incorporated will work with your business type to help you organize and define your business.

When you schedule your consultation, we will:

• Assist you with selecting the best business structure for your business

• Onboard your business using QuickBooks

• Offer monthly back-office accounting

• Work to financially scale and grow your business

• E-file your personal & business taxes

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