Lesson 2 of 4
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Overview of Self-Employment

Collin Gabriel February 1, 2022

Marissa Danley (00:01):

So now that we’ve talked about how taxes work, let’s segue into self-employment and what that actually means for tax purposes. Well, generally you’re self-employed if any of the following applied to you, and this is the i r s definition. So you carry on a trade or a business as a sole proprietor or as an independent contractor or as a single member llc. Those are kind of the, all the same thing here. Um, you may be part of a partnership that carries on a trader business. You may otherwise be in business for yourself, including a part-time business. So what that means is if you are working for your money and you’re not an employee, well, you have self-employment. So if you’re doing, you know, Uber, if you do landscaping, if you do anything that’s work that you get paid for, that is not as an employee, you have a business on a tax form. And that’s what that means. You don’t have to be registered with the state, you don’t have to be a legal business entity from a tax perspective. If you’re doing work and you’re getting paid for it and it’s not on a w2, you have a business.

Marissa Danley (01:11):

So that being said, there’s a couple of different business structures and I like to touch on these because people a lot of times will say, well, I don’t really know, or, Hey, um, I think I’m an llc. So I like to walk through this just so people get a definition of what the different structures are from a tax standpoint and how those tax returns work. Um, so sole proprietor or a single member, L L C, this is by far the easiest way to go. So from a tax perspective, we just file a Schedule C and we do that when we do your individual tax returns. So let’s say that you have some business income, but you also have a w2. We do all of that at the same time. Um, sometimes people come to me and they say, well, I’m an L L C and then I will say, well, for tax purposes an L L C doesn’t really mean anything.

Marissa Danley (02:01):

You can be a single member, L L C, you can be a multi-member L L C for tax purposes. We are going to file you as what’s called a sole proprietor, if it’s just you and you own your L your L L C. That being said, if there is more than one person on that L L C, you have what’s called a multi-member L L C or a partnership. And for this, for this presentation, we’re gonna be focusing just on the sole proprietors and the single member LLCs, but I just wanted you to be aware of these, um, definitions as we go along too. Um, so partnership or multi-member llc, that is a completely separate tax return. So what happens there is we take your income and expenses and then we allocate it out between the partners on the return. The partners then get a form K one and then they take that and put it on their individual tax return. So all of the tax is paid at the individual level on your individual tax return, but the partnership return has to happen so that we can allocate who gets what on the personal.

Marissa Danley (03:05):

And then things get a little bit more complicated. You can become what’s called an S corp. This usually makes sense when um, people have more income, more assets, a lot more is happening on the tax return. The real benefit of filing as an S corp is you can potentially save on some self-employment tax, but the costs of doing the S corp return are pretty significant. So, um, this is something that you could look into once you’re, you hit a certain threshold, but it, it is a fairly good size threshold. Um, and then that works just like the partnership return does in the sense that you’ve filed the tax return on its own, the S corp tax return, and then you get a K one which has all your individual stuff and then you put that on your individual tax return. Um, and then there’s a C corp, which I’m not gonna go into. That’s, uh, what you think about when you think about all the big corporations. That’s what a C corp is. Um, I don’t do any of those returns, I’ll put it that way.

Marissa Danley (04:02):

So now that we know what the different types of self-employment are, um, as far as tax returns go, let’s ta talk about the forms and things that might come to you. Um, in back in the day when you were a contractor, you would get what’s known as a 10 99 miscellaneous form that lists all the payments that you received as a contractor from a certain organization that has since been replaced with a 10 99 N E C, which means non-employee, non-employee compensation. So the 10 99 N E C has now replaced the 10 99 miscellaneous for most things. You may also get what’s called a 10 99 K. This is if you take, um, online payments. So if you do any sort of credit card payments, uh, PayPal, those sorts of things, you will get something from your processor that lists all of your income. And then money exchange for goods or service is not reported elsewhere.

Marissa Danley (04:57):

So a question I get really, really often is, well, you know, I didn’t make more than $600. I don’t have to report it. Well, that’s not true. Even if you don’t get a tax form, if you’re getting paid for, for work as a self-employed person there, there is no threshold. So you are supposed to report every dollar that you get. Um, there has been a big, a big tax thing going on lately where everybody’s worried that Venmo’s gonna tax send out tax forms based on like, you know, paying your D friend back for dinner. We’re gonna talk about that in a little bit, but just know that if you do get one of these forms, it’s generally for business, it generally should be on your tax return. And again, there’s no minimum threshold for reporting that self-employment income.

Marissa Danley (05:47):

Um, so let’s talk about what’s not self-employment then. Well, as we said, if you’re an employee and you get a w2, it’s not self-employment. If you win the lottery, it’s not self-employment unless you are in the business of gambling. If you get a gift, it’s not self-employment. If you have an inheritance, generally not self-employment and investment income unless you are in the business investing. So none of those things would be considered self-employment income. So when you’re self-employed, your taxes are done a little differently. So as I said, I’m gonna focus on the sole proprietor, single member L L C. Um, what we do there is we take your income and expenses and we put them on your tax return. But that being said, well, let me back up. You know, back in the day when I used to do in-person consults, I would always feel bad I would keep a box of tissue on my desk because I’d have clients come in and they were so excited because they’d make like, you know, $10,000 in self-employment and they were really excited, which is awesome and I’m excited for them.

Marissa Danley (06:49):

But then I would tell them that they would owe $3,000 of that 10,000. And you know, my goal is always to try to not make people cry. So I really like to educate people on this part of it. So when you do have self-employment, you’re gonna pay self-employment tax. And what I mean by that is, well, when you go to work and you get a paycheck from somewhere else, they’re taking the taxes out for you, right? They’re taking out your social security, your Medicare, your federal, and your state most likely. And when you’re self-employed, you’re the one that has to pay those taxes. They’re not coming out of a paycheck. And so when you come and see me, I’m gonna tell you, well you gotta pay your social security and you gotta pay your Medicare yourself. And that’s what the self-employment tax is. So that tax rate is, is roughly 15.3% of whatever your net profit is.

Marissa Danley (07:38):

So your income minus expenses, that’s what you’re gonna pay at least 15.3% on. Um, that makes up the Medicare and the social security. You’re also going to need to pay the federal and estate. So, um, what I tell people is generally income minus expenses equals your net profit. You’re in Oregon, most likely gonna pay 30 to 35% of that in tax. So when you’re budgeting, when you’re setting up your rates, when you’re charging people, build that into your fee schedule because, um, cuz you gotta pay it, you gotta pay it yourself. And that’s, that’s what it’s gonna end up being. Um, we also have deductions that are a little bit different than, uh, other taxpayers. There’s some things that we can write off that people that are not self-employed, um, they don’t write off. We also need to make estimated tax payments. So when I was just telling you about the taxes that you need to be ready to pay, um, a good, good rule of thumb is you’re gonna wanna pay those quarterly.

Marissa Danley (08:36):

We’re gonna talk a little bit about that in just a minute. Um, so again, I got a little ahead of myself, but in general in Oregon, you’re gonna be paying your federal income tax, you’re gonna be paying your self-employment tax that goes into your federal, they’re combined, but again, that self-employment tax is your social security and your Medicare that you need to pay. You’re gonna be paying Oregon State tax and then if you are in the Portland, uh, Multnomah County or the Trimont District, you’re also gonna have some local business taxes. So that’s what you need to be prepared for when we do your tax return. Feel like I’m, I’m going, are we doing okay? Any questions? I know I throw a lot of people, so please jump in.

Duane Lane (09:20):

So I had a clarification question if I could. Yes. So if I’m in Oregon and say my billable rate is $100 based off of that 30%, so $30 of my $100 billable rate is going towards, I need to set aside for taxes. Is that correct?

Marissa Danley (09:40):

Yes, yes, and yes and no. So think about it like this. Um, and this is why documenting things is really good. So it’s not just for tax purposes, but it’s for business health. So let’s say you charge a hundred bucks, but it costs you $20 to do whatever it is you’re doing. So at the end of the day, you’re only making $80, right? So it’s the 30% on the $80 is what you’re gonna wanna take into account. So it’s your income and then your expenses and then your, your profit is what you’re gonna pay that 30% on.

Duane Lane (10:13):

Okay? Does that help? Yeah, absolutely. That’s much. Thank you.

Marissa Danley (10:17):

Okay, great. Uh, are there any other questions? Yeah, any other questions?

Marissa Danley (10:27):

Okay, well, don’t be shy. I feel like, um, you know, the tax code is its own separate language and because I live in it, sometimes I forget that normal people don’t talk in tax code. So please let me know if I’m saying something and you need me to back up because it does just kind of, you know, I always tell people don’t take me to a party and give me a drink because at the end of the day I’ll walk out, just be talking about taxes. It’s just what I do. Um, yeah. Hi Norma, this Norma Jean. Um, hey Norma Jean, I have a question on the, the Portland Multnomah County. Okay. Um, so we, our business is here in Klamath Falls, but Dallas, as you know, travels throughout the state of Oregon and he does jobs up in Portland. So are we subject to the Portland mult, NOMA and trim taxes?

Marissa Danley (11:26):

Yes and no. Yes and no. So what we do is we allocate the income, so, or we apportion the income is the, the better term. So what we would do is we would take, you know, say 40% of his income was from uh, Multnomah County, Portland area, that’s what he would be paying tax on. It wouldn’t be the full amount of earnings for the year. It’s just gonna be what is in the Portland area. Okay. Um, I’ll go through and identify that then before I send over his stuff. Thank you. I was actually gonna ask you about that, so thank you. Um, yeah, and that’s, that’s it. If you’re not in the Portland metro area or the Trim district, you don’t need to pay it. But if you are doing some jobs up here, some jobs somewhere else, then yeah, we do have to apportion it out because, you know, you don’t wanna be paying more tax than, than you need to.

Marissa Danley (12:17):

Um, good question. And on that note, while I’m thinking about it, um, Eugene, if any of you are in the Eugene area, this, this is also a thing that started there in the past year or two. There is a local business tax down there in Eugene as well. Just a heads up on that. Um, also, well I’m thinking about it too. I don’t know if we have any Washington people in here, but Washington does have something called an excise tax, um, business and occupation tax. So if you are in Washington, you may be, uh, looking at that as well. I know taxes are not always the thing that keeps people awake at four 30 in the afternoon. Um,