Freelancers, platform workers (such as Uber drivers, TaskRabbit handymen, and Fiverr web designers), and solopreneurs represent a significant segment of workers in the United States. Approximately 35% of Americans freelanced in 2018 and that number is expected to grow. One reason for the growth of the “gig economy” is the fact that 59% of U.S. companies use a flexible workforce that includes freelancers, so opportunities abound.

I believe that self-employed people as a group are very important to the U.S. economy. To help the group succeed, I wanted provide easy-to-understand explanations of serious, complex, back-office issues for self-employed individuals: keeping records, paying taxes, collecting fees, making smart financial-related business decisions, and finding strategies to grow. This book is aimed at the self-employed service provider who bills for his or her time, works alone, and has responsibility for all aspects of the business. I salute you.

If you're thinking about starting a business, you have already begun one, you engage in gig work on a full-time, part-time, or occasional basis, or you just have some side hustle, you are not alone. There are estimated to be more than 30 million workers who are already self-employed and file Schedule C to report their income and expenses. And a 2019 survey by FreshBooks found that an astounding 24 million employees are thinking about leaving their full-time jobs to pursue self-employment. The latest statistics show that Schedule C filers collectively had profits of $328.2 billion, with profits on the rise. The Federal Reserve says that 3 in 10 adults in the United States are engaged in the gig economy. And looking ahead, the number of people working for themselves in some capacity is probably going to continue.

There are several reasons why the ranks of self-employed individuals are expected to grow:

• Entrepreneurial spirit. More and more people are being bitten by the bug to start their own businesses. Some simply want to make a living to support themselves and their families. Others want to change the world through their business activities. Seniors who retire from their jobs and want a meaningful “second act” in their lives are starting businesses; they are called encore entrepreneurs. And Gen Z'ers have a new view of entrepreneurship that offers them the opportunity to sell their skills and work independently. One recent survey found that 70% of those about to graduate from college say that the freedom of working for themselves outweighs job security and they favor entrepreneurship.
• Technology. The Internet, smartphones, and other technological advances have made it easier to get started in business with a minimal investment and to market yourself. Mobile devices enable self-employed people to communicate faster and collaborate easier. And a growing number of online platforms, such as Uber, TaskRabbit, Takl, and Fivrr, offer easy ways to connect with people who need various services.
• Changing economy. The reality is that alternative work, contingent work, on-demand workers, or whatever label you want to put on it is what corporate America and consumers want. They want their workers on hand when and to the extent needed. One study found that 94% of the net employment growth in the U.S. between 2005 and 2015 was in this type of engagement.
• Changing perceptions. Several years ago, a study found that Americans had mixed opinions about gig work. But as the number of gig workers grows, the status of alternative work rises. One 2019 study found that the public perception of on-demand work is very high (70% said they were equally as respectable as traditional jobs and 6% said they were more respectable).
• Changing law. Solopreneurs historically have been responsible for all of their protections. However, the laws are changing to ensure that freelancers get paid for work they do, permit them to opt in for workers’ compensation, and obtain other benefits previously reserved for employees.

Whatever your reason for going it alone as a self-employed individual, there is always room in the marketplace for people with good ideas who are willing to work hard and provide something of value to others. If you are in this group as a full-time endeavor, a part-time activity, or an occasional gig, you're onto something big.

Even though you work alone in your own business, whether as a freelancer, independent contractor, consultant, or business owner with no employees, you have unlimited opportunities for success. What you earn is all yours after you pay your expenses, including taxes. There are many tax breaks that enable you to legally minimize what you have to pay, but you have to know what they are as well as the steps needed to secure them in order to benefit.

You may be asking yourself, “Why do I need to know about taxes when I use an accountant, enrolled agent, or other tax expert to prepare my returns?” The answer is simple: It's your responsibility to see that you do your taxes right, even if you use software, a cloud solution, or a tax pro at tax time.

What's more, if you don't learn about taxes, you may miss out on valuable tax-saving opportunities you could have used to cut your tax bill, improve your cash flow, and save you money. For example, it makes a difference for taxes whether you buy or lease equipment or whether you hire employees as your business grows or outsource to independent contractors, and you'll only be able to make smart business decisions if you understand their tax ramifications.

Recognize that the numbers for taxes may change from year to year, with some deduction limits increasing due to cost-of-living adjustments or law changes, but the basics remain fairly constant. Granted, a new incentive to spur business development may be introduced, there can be temporary relief for businesses impacted by certain disasters, and some tax laws do expire. However, once you grasp the basics, you can better understand not only your own tax situation, but also discussions in Congress to reform, revise, and revamp tax rules that could impact you.

About This Guide

As a self-employed person, you have to handle many if not all of the aspects of running your business. This guide won't tell you what type of business is best suited for your talents and interests. It won't tell you how to market yourself, what to charge for your services where you have the flexibility to set your rates, or how to handle disgruntled customers. The guide is intended to help you with some business aspects with which you may not be familiar but that have a great impact on your bottom line. It focuses on taxes as well as many legal and financial matters for your business.

This guide is designed for you, the self-employed person working alone as a service provider, to help pin down all of the tax breaks to which you may be entitled.

• In Part 1, you'll learn the basics of tax reporting. This includes what it means to be self-employed, and an overview of what you have to report as well as where and when. It's best to get set up right from the start to make tax reporting more efficient and maximize your write-off opportunities, and you'll find out how to do this easily and at low cost. You'll become familiar with Schedule C, the basic tax reporting form you use as a self-employed person working alone.
• In Part 2, you'll see the various types of deductions and credits you can claim to reduce the revenue that's taxed. Most business expenses can be written off; the question is merely when and to what extent the tax law allows. And, being self-employed may entitle you to claim a special personal deduction if your business activities are profitable; it's called the qualified business income deduction.
• Part 3 moves beyond federal income taxes to some other tax responsibilities you face as a self-employed person. You'll also find an array of planning strategies that you can use to make better business decisions throughout the year, decisions that will, hopefully, result in higher profits while saving you taxes. You'll see what steps you can take to grow your business, including mentoring, getting certified, and using technology. And you'll learn about other strategies you can employ as your business grows, from moving to larger quarters, to changing your business entity, taking on employees, and eventually selling what you've created.

Don't be intimidated by taxes and other responsibilities of being self-employed. Instead, embrace the opportunities that a better understanding of tax, legal, and financial responsibilities can produce. You're not alone when it comes to dealing with taxes and other business matters; there's lots of help. Resources you can use are mentioned throughout the book. To keep you informed of tax changes you'll want to know about, check for news at JKLasser.com as well as on my site, BigIdeasForSmallBusiness.com. I invite you to share your business experiences with me at Barbara@BigIdeasForSmallBusiness.com.

Being self-employed is an awesome thing. You control your destiny and your earning potential is limitless. You can set your hours, subject to the demands of the project or activity you're working on. If you're an employee satisfied with your job, you can supplement your income with a side hustle. And, as a self-employed individual—full or part time—you can achieve a work–life balance that enables you to attend to your other interests and responsibilities. Be a mompreneur or dadpreneur. Care for an elderly parent. Take time to train for a marathon. Travel.

Of course, you have many obligations that come along with being self-employed. Whether your business makes or loses money, you have to report your income and expenses to the federal government if you are otherwise required to file a tax return. Depending on the state you reside in, you'll also have to report your business activities to your state.

In order to report your income and expenses, you need to understand how being self-employed affects your taxes. If you are just starting out in business and formerly were an employee, things are very different as a self-employed individual. Instead of receiving a W-2 from your employer telling you exactly what you must report as income for the year, it's now up to you to track what flows in and out of your business coffers so you can report this at tax time. You may receive 1099s from businesses for which you perform services, but these forms may not tell the whole story of your revenue for the year.

You also must become familiar with tax terminology and rules that affect your tax responsibilities. And you should think about matters beyond taxes that become your responsibility as a business owner, including your health coverage (Chapter 8), retirement savings (Chapter 8), and insurance protection.

What Does Self-Employment Mean?

Solopreneur, independent contractor, platform worker, direct seller of skills,  freelancer, consultant—whatever term you apply to yourself, you are a self-employed person if you have not formed a corporation for your business activities. If you have no co-owners, then you are automatically treated for tax purposes as a sole proprietor and are required to file Schedule C with your personal federal income tax return, Form 1040. If you are age 65 or older, you can file Form 1040-SR instead of Form 1040. If so, then attach a Schedule C to this return.

Self-employed farmers file Schedule F; that is not discussed in this book even though many of the deductions and strategies in this book apply to farmers. Suppose you set up a limited liability company (LLC) to achieve personal liability protection (explained later). If you are the only owner (technically called a member), then you, too, file Schedule C unless you take steps to be taxed in another manner.

Being self-employed means that you are taxed on the net result of your efforts for the year, regardless of what you have left in the bank, what you spend on your personal needs, or what you reinvest in your business.

Legal Consequences of Self-Employment

There are important non-tax results from being self-employed as a sole proprietor. You are personally liable for all of the debts of the business. If, for example, someone is injured on your business premises and your business insurance doesn't cover the claim, your personal assets—the home you own, your car, your savings account, and other personally owned property—can be taken to satisfy the claim.

Personal liability probably isn't a significant issue for many types of sole proprietors. What's your exposure to liability if, for example, you're a freelance writer? However, for other sole proprietors, such as daycare owners, liability can be an issue. Fortunately, it can be addressed satisfactorily by having adequate insurance. Whatever type of business you're in, be sure to discuss your liability coverage with an insurance expert to cover your bases.

When you start a business, the farthest thing from your mind is failing. You are optimistic, confident of your business idea and abilities, and expect to achieve success. Of course, the reality is that nearly as many businesses go under each year as start up. Being a sole proprietor means that if business debts mount and you're going under, your only bankruptcy option is to file as an individual. Your business cannot go bankrupt separately from your personal affairs.

Keep in mind that you don't have to stay self-employed forever. If your business takes off and you want to expand, you may change your business organization from a sole proprietorship to something else, such as a corporation or a limited liability company. At that time you'll base your decision for which entity to use on a number of factors beyond obtaining personal liability protection, including whether you take in co-owners and what your ultimate plans for exiting the business will be (see Chapter 14).

Practical Issues in Self-Employment

Working alone means you shoulder all of the responsibilities for your business. You're the head of marketing, chief financial officer (CFO), and mailroom worker all at the same time. All of the business activities, from producing income to administrative chores, are up to you.

You can share the workload with others by hiring employees, engaging independent contractors, or using temporary workers (who are employees of the agencies that send them to you). Whatever works best for you is fine, as long as you remember that, to paraphrase President Truman, the buck stops with you. The results of your workers’ efforts are your responsibility. If they make mistakes, you must deal with it. If an outside bookkeeper fails to include all your fees in your accounting software and you don't report the income on your tax return, it's your neck on the IRS's chopping block, not the bookkeeper's.

Keep in mind that this book will help you handle the tax results of outsourcing the work you need to get done. It will not cover all of the details of employer responsibilities for putting people on your payroll, which is a book in itself, but will inform you of the basics of becoming an employer (see Chapter 14).

Another consequence of being self-employed means you don't have a government-provided backstop if you lose work or are injured in the course of business. Unlike employees who can collect unemployment benefits when they are laid off or can receive workers’ compensation benefits if they're injured on the job, self-employed individuals need to take care of themselves. Only employers contribute to the unemployment fund through state and federal unemployment taxes; as a self-employed individual you don't have any employer, including yourself, to make the payments. In some states, self-employed individuals, who are exempt from workers’ compensation, can opt into the workers’ compensation system by making certain annual payments.

And yet another consequence of being on your own means there are no employee benefits to enjoy. No one else is paying for your health coverage. No company is seeing that you save for retirement. No employer is helping you with your education. You must do all of this yourself. It's worth noting that some platforms are starting to provide benefits to their gig workers. For example, Postmates has a suite of benefits for its 350,000 gig workers, including occupational accident insurance, access to free online college courses and certain certification programs, and some health care options. Whether this will become a trend—for platforms to offer fringe benefits to its independent contractors—remains to be seen. It's usually up to you to provide your own benefits, as explained in Chapters 7 and 8.

Tax Terminology

Before you can report your income and expenses on a tax form or use tax-saving strategies, you need to understand the terminology. The terms you use in business are not necessarily the same ones used for tax purposes. For example, your business income may be called revenue, gross receipts (a term associated with businesses that sell goods rather than services),  fees, commissions, or earnings. For tax purposes, they are collectively called income.

From a business perspective, you may think “profits.” In tax jargon, profits are called net earnings from self-employment. Net earnings are what's left over from fees after paying deductible business expenses.

Not all money coming into your business is taxable. If you borrow money, the loan proceeds are not taxed, regardless of amount. By the same token, when you repay the principal, you can't write this off.

Losses for tax purposes may also differ from your business perception of this term. Sure, the term applies when you sell property for less than you paid for it. In this book, the focus is on losses from your business activities that result when your deductible expenses are greater than your income (other than income that is not taxed). For example, as you'll find out later in this book, only 50% of the cost of business meals is tax deductible, even though you paid 100%. The full cost is a reasonable and appropriate business expense, but the tax law still has this limitation. You may, as a result of limits on write-offs, suffer an economic or financial loss, but still show a profit, and owe taxes, for tax purposes.

Being 1099ed

When you perform services for another business and are self-employed, that business is required to issue Form 1099-MISC, Miscellaneous Income, if it pays you $600 or more in total for 2019. Box 7 of this form lists nonemployee compensation. The form is given to you and to the IRS. With its computers, the IRS matches the information on the form with what you report on your return to make sure you've fully and properly reported the income. However, the reporting of your earnings is set to change. Fees and other payments to independent contractors earned in 2020 and later years will be reported on Form 1099-NEC, Non-Employee Compensation, replacing the box 7 reporting on Form 1099-MISC.

The business will request that you complete Form W-9, Request for Taxpayer Identification Number and Certification, so it can have your proper tax identification number (explained in Chapter 2). This form does not go to the IRS.

If your customers or clients are individuals (consumers), they do not have to issue a 1099. Regardless of this, you must report all of the income you receive— from businesses and individuals—whether or not it's reported to the IRS.

If you are paid by credit card or electronic transfer (e.g., PayPal), the business you performed services may not have to issue Form 1099-MISC (or Form 1099-NEC for earnings after 2019); the bank or credit card company will issue Form 1099-K instead (assuming this form is required).

What's Ahead

Before you can complete Schedule C, you have to get set up to deal with taxes for your business. Chapter 2 explains why recordkeeping is important for business and tax purposes, and how to keep your books and records. As you'll see, good recordkeeping and taking other measures ensures that you are in the best position to take advantage of tax breaks to which you are entitled.