The deadline for filing taxes is approaching quickly, bringing with it one task most of us don’t look forward to ~ preparing our annual tax returns. Since there is always the chance that we’ve overlooked some essential planning, I thought this might be a good time to talk about one of those important items ~ your tax status as the IRS sees you.
When Setting Up Your Home-Based or RV Business…
Make sure you know whether you’re a Remote Employee or Self-Employed Contractor according to IRS Tax Rules. Determining this seems simple enough, but sometimes the lines seem fuzzier than they should be. So, read the IRS regulations defining Employee and Contractor Tax Status, here. This page, also, has links to several forms that you can use to get an IRS determination, in case your situation isn’t clearly described.
Why Is Tax Status Such a Big Deal?
One of the scams we entrepreneurs must constantly watch for is the client who expects us to work as though we were his employee, but under the guise of contractor status, and without providing the benefits required of employers. Don’t rely on clients to look out for your rights. Take the initiative to protect them yourself.
Many employers want to hire self-employed contractors to gain the advantages of
- avoiding labor laws required for employees
- not having to provide employee benefits, especially health insurance
- better business insurance coverage and keeping rates lower
- reducing overhead costs of office space, utilities, equipment, and supplies
- avoiding deducting and paying Federal or State taxes on your behalf
Yet, many still try to control how you do the work as if you were an employee. When this happens (and it is more common than you’d like to think) it crosses the lines. Not only is it illegal, but you are being abused. Personally, I would sever ties with this kind of client if it becomes clear that he’s taking advantage of me.
Know your rights. You can learn them from the above-linked page on the IRS website. Tax status criteria are intended to prevent employers from gaming the system, but it depends upon us to enforce them.
Your tax status also determines
- which records you have to keep
- how you report your income and expenses on tax returns (whether you need to file a Schedule C)
- the labor laws that affect you.
Finding this out at the end of the year could mean going back and trying to recover all your business receipts and records that you didn’t think you’d need. There’s reason to be concerned if you receive a 1099 when you expected a W2, or vice versa. If you didn’t pay your income taxes on a quarterly basis, because you thought you were an employee, you could be hit with fines and penalties. If you were treated as an employee, you might have a claim against the employer.
The page linked above has additional links that state the criteria to help you decide, such as whether or not the employer/client has any control over HOW, WHERE or WHEN you do you work. Knowing this in advance should help you in creating a contract or work agreement that specifies clearly what your tax status is before you do any work.
Employee vs. Contractor Obligations
If your client/employer asks you to fill out a W4 form, the employer plans to treat you as an employee (make sure they pay half your FICA tax.) If you haven’t filled out a W4, plan to treat every dollar that client pays you as Schedule C income (self employment, contractor.)
As a remote employee, the employer has much control over how, when, and where you do your work. He will also deduct your income taxes and pay them through his ordinary employee payroll tax system. He has to abide by all the labor law obligations of any employer.
If you are told by your client/employer that you’ll be sent a 1099 you will be treated by them as a self-employed contractor (be prepared to pay all of your FICA tax, yourself.)
As a self-employed contractor, the employer is actually your client. As such, he has little to say about HOW, WHEN or WHERE you do the work beyond what he wants you to accomplish for him and by what deadline. You work according to an agreement you make with your client that defines what you are to produce and by when. It’s smart to get this in writing. People have a way of forgetting these details. Outside of that, you decide how to fulfill your agreement.
Your client will NOT deduct or pay any payroll taxes. You will be responsible for filing and paying quarterly income taxes. Labor laws are not applicable in a contractor/client relationship.
This seems pretty straightforward, but there are some important things to know before you commit. Scroll down that same page to the “Common Law Rules.” These will help you determine if the employer is classifying you in the right tax status.
Knowing what your tax status is will help you to track tax deductions, receipts, payments and other documents consistently from the start. You will probably have tax-deductible expenses if you work from your home or RV as an employee, but fewer than if you worked from a fixed location.
I’m not a tax professional and am speaking primarily from personal experience. So, to be sure that you make the right decisions consult a tax preparer, accountant or attorney, and read the related IRS publications found also on the IRS.gov site. If you do your own taxes with a program like TurboTax or H&R Block, the software should help simplify things.
Income and Expense Reporting
As an entrepreneur, with tax status of contractor, you are responsible for your quarterly tax payments. You will have only your records to go by until you receive a 1099 in February of the following year, if your client(s) sends one at all. As I recall, they don’t have to send a 1099 if they paid you less than $600 during the year.
If you run more than one business, you’ll have a lot of bookkeeping to do. You’ll have to allocate the depreciation of your business equipment and expenses proportionally, according to each business. You’ll deduct the proportioned expenses from each respective revenue source on a separate Schedule C (sole proprietor unless you have another business format.) So, be ready to track the amount of depreciation, time (or other valid measure) each piece of equipment, or portion of supplies is used by each business, similarly to the way you would track the use of your vehicle for business expense purposes.
Principal Business or Professional Activity Codes
If your tax status is independent contractor, you will report self-employment income in your personal tax return on Schedule C, on Line B with a code and a category that you choose from the Principal Business or Professional Activity Code list (PDF download link.) If you are a remote employee, with employee tax status, you won’t use these codes. You’ll file your income as regular employee income without the Schedule C.
The Principal Business or Professional Activity Code is a six-digit code that classifies your specific income niche. You, also, can find these codes on the IRS page for Form 1120.
Look up the type of work you do, by classification, and pick the six-digit code that most closely describes what you do. If you do several things, you might find several codes that would work for everything you do. Pick one, and use it consistently from year to year. Use this code on your Schedule C, Line B where you’ll report related income and expenses. If you actually change the kind of work you do, you will have to use another code.
If necessary, file two (or more) Schedule C forms if you do both kinds of work in the same year. For example, if you are a writer, but also do workcamping, these would be two different categories. If you do RV repairs, and also sell crafts on Etsy or EBay, these would be two different categories. But if you sell crafts on Etsy and EBay and at fairs, this would probably be one category with one code (and one Schedule C,) even with different venues. It’s best to get a professional opinion if you are unsure.
As an aside, the Principal Business Activity Code list might also be useful in deciding what kind of work you can do from home or RV, if you’re still looking for RVer income ideas. If you want more ideas about work from home or RVer income ideas visit our Work From Home Ideas You an Adapt to Your RV Lifestyle page that you can download as a PDF file. http://adhocgroup.net/WFH/Work-From-Home-Ideas.pdf
Wishing y’all great RVing adventures
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