
Growing up, my father used to tell me there were only two things in life that you have to do: pay taxes and die. He had a point. As an adult living in the USA, I dread the April 15th deadline to make sure my taxes are done and sent to the IRS. Most people will have it done by a tax service long before then, but us, well that’s a discussion for another day.
First and foremost, I am not a tax professional or a financial advisor. I work in Healthcare, I have no idea about tax laws or how to do my taxes, much less help anyone else. Please consult someone who is certified before you file! Also, the American IRS pertains to American taxes make sure to research the proper filing forms for your municipality.
W2 Employee vs 1099 Independent Contractor
There is a lot of debate that circulates among the courts about the differences between an employee and an IC. There are some key differences but the lines can get blurred in the gig economy. Various states have also made laws concerning IC’s to ensure that workers’ rights aren’t being violated, but this isn’t as far-reaching as one would hope in today’s gig economy world. Here are a few ways to tell the difference but as always when in doubt, Google is fast and free.
- If you were required to fill out a Form W-9, you are an independent contractor
- If you are being required to follow a company written schedule, you are an employee
- If you are being told “how to” do the work such as through mandatory training videos or unpaid meetings; you are an employee
- If you are providing your own space and tools to complete the work, you are an independent contractor
- If you are required to clock in/out, have scheduled break times for lunch or bathroom breaks; you are an employee
A good way to think about the difference is to imagine you’re a painter and you are hired to paint a nursery. The client picks out the color and you buy the paint, rollers, and other needed supplies. You paint the room and get paid the agreed-upon price. The client is happy, you’re happy and you leave your number in case they need your service again. This is what we generally think of when we think of a contractor.
On the other hand, if you are a sales rep for a cell phone company, calling potential customers to sell them products and services with a set schedule and working in an office, even if you are making commissions only, you are likely an employee.
A Schedule C and You
As an Independent Contractor, you are required to pay your taxes on any earnings. Notice I did not say profits. Every dollar you bring in is subject to taxes, you must report any earnings over $600. “Earnings” in this context means every payment you get, it doesn’t matter if your account is in the hole, you must count every single dollar. Nobody wants to piss off the IRS, audits are not at all fun, I promise!
You will be required to file a Schedule C along with your 1040. To determine your actual profit, you will need to know how much you invested in your business and how much you earned.
For a small side hustle, I find it to be the most cost-effective to use Google Sheets. It’s free and online so you can always have it on hand when you need it. My 2025 Sheet looks something like this:
Date | In | Out | For | Balance |
---|---|---|---|---|
1/8/25 | 17.16 | Namcheap.com Hosting | -17.16 | |
As you can see, I have a space for the date so I don’t forget when the transaction happened, space for money in or out, what I bought, and what my balance is. Currently, I am in the negative. You can take this a step further by adding a column for the tax percentage saved. A good rule of thumb is to put away 30-40% of your earnings to go strictly to taxes.
This method is a great way to keep track of how much you’re making too. If you are putting a ton of money into inventory for instance but only selling a small amount at any given time, you will see it pretty quickly and be able to make changes sooner rather than later.
Finally, a reminder to hold on to receipts. If you are buying things online, keep a folder in your email box to hold onto the invoice from the provider. If you buy things in a retail store, use something like a wooden box to hold them and keep them in a safe place. Your tax advisor will love you for being so organized!
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