When you were growing up, did you ever get the idea to have a lemonade stand? It seems like almost every kid does at some point. How did it go? You probably had incredible excitement and energy around setting up a table, making a pitcher of lemonade, and the plans for what you would do with your lemonade empire riches! For most young lemonade entrepreneurs, it ends up in a few sales to kind neighbors, a few friends with pocket change, or perhaps dad, because mom told him to go buy a cup. Your lemonade conglomerate, much like my own, probably shut down after one day.
If someone has a one-day lemonade business career, it raises a question: was that a business? You might laugh at that but think about it. Did the business existing for one day mean it was or was not a business? What about If It made a profit? Does it matter if you consider it a business?
Lemonade sales aside, this is a trickier question than you might think. Many people are unsure if they are self-employed or have a business. Many are self-employed or have a business and don’t know it. Keep reading for some thoughts on why it matters and how you can figure this out.
Why does it matter?
You might be asking why this question even matters. The biggest reason is it makes a difference to the IRS. Uncle Sam wants to know if you are engaged in business activity so he can get a cut. If you have business activity (keep reading for what this is), you run the risk of underpaying your tax liability and facing penalties. This can also come into play with all manner of documents like scholarship applications, loans, or even applying for a job.
How to tell if you’re self-employed
There are a number of cases where you can fall into the government’s definition for self-employment. Here’s a few examples.
1099 or contract employment
Did you do some work for a business/organization and get paid? If the party paying you considers you a “contractor” and not an employee this falls in with the self-employment category. Another clue is the tax form you receive. If the company sends you a tax form 1099 instead of a W-2, this is an indication that you have some self-employment income in the eyes of the IRS.
Did you drive for a ridesharing company like Uber or Lyft? Did you do some freelance work in your field? How about some work for a website like fiverr that pays you to do a task? Online tutoring? Side-hustle? These scenarios likely fall into the self-employment category.
This is more obvious, but still worth remembering for those that establish a formal business entity like an LLC. Even though you may have gone to the trouble to set up a business entity, you may still be self-employed for financial or tax purposes. This may be worth engaging with a qualified CPA or accountant to sort out.
Selling products and multi-level marketing
Have you ever sold stuff like Mary Kay, clothing, supplements, or other products? Multi-level marketing type of arrangements almost always fall into the self-employment designation. Keep in mind, just because you only did this a “little” or “on the side” does not matter to the tax code.
Making stuff and selling it
Do you sometimes bake or cook food to sell to others? How about making some artistic creations you found on Pinterest and selling it to friends or on social media? This likely counts as self-employment.
“A good goal is like a strenuous exercise - it makes you stretch.” Mary Kay Ash
All the rest
The above cases are examples, but there’s other scenarios out there that could put you in the category of self-employment. If you’re unsure, it’s best to do some homework and check this out. You can engage with a qualified CPA, financial professional, or check out some of the IRS resources on this topic.
What to do next?
If you do determine you or your spouse falls into the self-employment realm, don’t worry. It’s not a bad thing, but there are some things to keep in mind.
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