How Should You Register a Gig Business? Are You a Sole Proprietor, LLC, or Independent Contractor?
Being a gig worker is an awesome career choice. You get to follow your passion, choose your direction, and set flexible work hours. However, you must register a gig business.
You get to make some other decisions that aren’t quite as fun, like your tax status. Uncle Sam (aka the Internal Revenue Service) expects their cut of your income, and you don’t want to mess around and make expensive mistakes at tax time.
As the owner of a gig biz, you have a few options.
You could register as a sole proprietor, an LLC, or an independent contractor. They’re all similar, but some nuances give each option some critical distinctions to consider.
If you haven’t registered your biz yet, or you’re thinking of making a change, this article is for you.
1. You’re Self-Employed, What Does That Mean to the IRS?
You work for yourself instead of relying on someone else to hand you a check for the work you do.
To the IRS, you fall under the heading of self-employed. That means no one else pays you a weekly salary and takes taxes out for you.
Whether you’re a freelancer, independent contractor, or something else doesn’t matter to them. The point is that you have to pay your share of Social Security and Medicare when you file your income taxes.
Tax Obligations for Self-Employed Individuals
Working for yourself means that you are the legal entity paying taxes. Your social security number (SSN) or employee identification number (EIN) is linked to the payments you receive. Then, you pay taxes on that income.
The IRS recommends paying estimated taxes quarterly and filing your return annually.
What Your Taxes Cover
When you file, you’re paying self-employment taxes (SE tax) and income tax. The SE tax goes toward the Social Security and Medicare programs, just as you paid when you worked for someone else.
Currently, the self-employment tax rate is 15.3%. This number is inclusive of both Social Security and Medicare.
Social Security receives 12.4%. The fee pays those who qualify for the benefit due to old age, certain survivors, and those in need of disability insurance. Medicare programs receive 2.9% to pay for hospital insurance once you qualify.
For the most part, you’ll use a Form 1040 or 1040-SR (also called a Schedule SE) to report your income. However, this and other tax-filing advantages will depend on how you’ve registered your gig business.
Need Help Filing Self-Employment Taxes? Check out our guide on how to file self-employment taxes.
2. All About Sole Proprietorships
A sole proprietorship includes independent contractors and those who run a one-person business. A sole proprietor is the default term used for any self-employed person who owns their own business and hasn’t registered with their state as a specific entity.
As soon as you start working for yourself and have business expenses and an income, these become separate from your assets. You’ll file a personal tax return and pay business income taxes.
Breaking Down a Sole Proprietorship
Running a business as a sole proprietor is the simplest way to have a gig biz. It doesn’t require a specific EIN, and your finances are still connected to your business. You just pay taxes on the income you received using the Schedule C-1099-MISC forms your clients send you in the new tax year.
As a sole proprietor, you’re the single member of your business, and you’re entitled to some government assistance.
Benefits of Being a Sole Proprietor
For tax purposes, sole proprietors double as business owners. So, anything that applies to a business owner would apply to you, including how you’ll file for taxes and the kind of financial aid you can receive.
For example, you’re able to apply for any grants that are open to a business entity. You’ll find that there is a specific pool of grants available to you because you’re an entrepreneur.
Government relief programs are also open to you.
Did COVID impact your business?
Whether you’re the only employee or you have a few, the Paycheck Protection Program could help.
And if you lose your income to take care of yourself or your sick family member, you can apply for the Sick Leave and Medical Leave tax credits.
One more thing you might not have realized is that you can also receive unemployment if you’re self-employed. So if your business is going through a dry spell, check with your local unemployment agency to see how you can qualify.
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Should You Be a Sole Proprietor?
Being a sole proprietorship has a lot of advantages, but it’s not the best way to register every business. You may benefit from this tax status designation if you fall in one of these three categories:
- Independent Contractor: You’re a self-employed person who contracts with clients on a case-by-case basis. You decide which clients and projects to complete and structure the final work based on the client’s preferences.
- Business Owners: As a business owner, you’re also self-employed. But you get to choose the work and the method you use to complete it. Clients come to you if they want the work you offer. Business owners often have employees and payroll.
- Franchise Owners: Owning a franchise sounds like a bigger job than a sole proprietorship, but it’s possible to be both. These business owners pay royalties to the franchisor and use their model and brand to run their company.
Cautions Against Sole Proprietorships
Although running a sole proprietorship is the simplest kind of business strategy, there are some things to be aware of first.
3. What’s An LLC, Anyway?
You’ve seen the letters ‘LLC’ at the end of lots of physician and attorney groups. What exactly does it mean?
The acronym ‘LLC’ stands for limited liability company. It’s a method of registering a business in a way that separates the owner’s personal and work assets.
LLCs can be any size. Many corporations have this designation, including PepsiCo and Johnson & Johnson.
Breaking Down an LLC
Because an LLC prevents the personal responsibility of a work-related debt, it’s common for business owners to choose this tax registration status. That way, if the company gets sued or ends up in bankruptcy, the owners’ and investors’ personal assets aren’t liable.
Another attraction of an LLC is that profits aren’t double-taxed as personal income and profit. Instead, the business owner pays taxes on these funds as their net income when they file personal taxes.
Benefits of Being an LLC
In addition to these tax-filing advantages, there are other reasons why small business owners may prefer using an LLC business structure.
For instance, if your goal is to find a way to qualify for government grants for entrepreneurs, an LLC still has you covered. Until you incorporate your enterprise, you’re still eligible for anything marketed as a small business grant.
The same rule applies to government relief programs for small businesses. You’re entitled to benefits such as the Payroll Protection Program and federal leave for medical care as a sole proprietor would be.
Your business is responsible for payroll taxes for part- and full-time employees. However, the LLC doesn’t pay federal income taxes. The owners cover any profit on their personal tax returns.
At the end of the year, an LLC also gets extra tax deductions for business expenses. You can deduct liability insurance and workers’ compensation coverage, office space, and anything else related to the job.
Should You Register as an LLC?
Does your business have the potential to impact your personal assets if something unfavorable happens?
An LLC helps minimize personal liability for all partners and investors involved.
For instance, many physicians are LLCs because their job comes with a high medical malpractice risk. This designation separates their personal assets if the doctor or office faces a lawsuit.
Another example is a business with a lot of overhead or debt. A business partner planning on taking out a hefty loan to expand their business might want to become an LLC first. That way, if the business isn’t profitable and they can’t pay the loan back, the owners’ personal assets aren’t at risk.
If this is a concern for you, an LLC gives you the peace of mind of knowing that your business won’t affect your business.
Cautions That Come With LLCs
The designation of an LLC does provide liability protection. But there are also some factors to be aware of before you opt for this route.
LLCs involve multiple members. If one of those members passes or goes bankrupt, dissolution laws kick in, depending on state law. And if you want to trade your company publicly, you won’t be able to do this if the business is an LLC.
4. Independent Contracting and the Tax Laws
If you’re not working with anyone else, but you don’t fall under the sole proprietor heading either, you could be an independent contractor.
This is someone who provides services for another person or business but isn’t an employee.
Breaking Down an Independent Contractor’s Role
You come and go as you please, within the structure of your client’s job requirements.
This might mean that you do their IT technical work on an as-needed basis, but you have to come in while their office is open.
Or, they hire you to finish a creative job. You do the work at your own pace, but you have a deadline to meet and an end goal to achieve.
Benefits of Independent Contracting
As an independent contractor, you get paid for completed work. You and your client set the rate on an hourly or per-project basis.
Self-employed people who fall into this category have total income accessibility. But they still have to pay business taxes on their personal income tax return.
The entity that pays you doesn’t withhold FICA payroll taxes. So, you make a lot of money upfront, but keep in mind that you’ll still have to pay self-employment taxes.
Typically, an independent contractor doesn’t have a lot of business debts. This type of business qualifies for government grants and federal aid programs, such as the CARES Act for loss of income due to the COVID-19 pandemic.
You’ll use a special tax form when you file taxes. But you connect your business to your personal bank account.
Independent contractors are any person who provides a service to the public. A mechanic running their own business would be an example. As the owner, this person would set their prices, collect payment directly from the customer, and file taxes on the money received.
Cautions Against Independent Contracting
As an independent contractor, you’ll have to be very organized with your finances. You’re responsible for federal, state, and local taxes. You may have to submit quarterly estimates to the IRS, and consider your retirement funding, as well.
Independent contractors aren’t typically eligible for unemployment as a sole proprietor or LLC owner would be.
In general, your funds, and your future, are in your hands. If you don’t do the work, you won’t get paid. And when you get paid, part of that money needs to go straight back to the IRS and into your retirement fund.
Still Getting Situated? We Offer 10 Small Business Essentials Every Entrepreneur Needs.
5. Need More Help? Try These Resources
We get it. Payroll issues, Medicare taxes, quarterly filing … it can be a confusing headache. While the information above may help to point you in the right direction, your specific situation may be too complex to figure out with a single article.
The good news is that there is a mountain of resources available to help you. You don’t have to do it all alone.
Here are a few of our favorite helpful tax-filing expert sites:
- Gigly: Looking for tax and legal advice? Not sure how to handle your health insurance tax payments? A membership with Gigly gives you access to legal aid, discounted healthcare, and much more.
- Turbo Tax: You can use Turbo Tax to file your income tax return, but the tax tips may save you thousands of dollars, too.
- SBA.gov: Business owners can access the government’s grant system, a database of helpful tips, and other resources from the Small Business Association’s website.
Running your gig biz instead of working for someone else is a life-changing journey. Along the way, though, there will be some challenges, like filing taxes and registering your business.
This step-by-step guide, and resources like Gigly, will help you overcome any obstacles so you can focus on your business’s successful future.