Employed, self-employed, or unemployed: What different situations mean for taxes

Being employed, self-employed, or unemployed may look different day-to-day. These differences extend to how professionals in each situation handle taxes. As Tax Day draws closer, questions about which forms to file, what you owe, or how much you’ll be refunded can clutter your hectic to-do list.   

Different employment statuses can affect how you’ll approach your annual return. Each situation may mean eligibility for varying deductions or credits. Having a general sense of how your situation affects your tax obligations and potential savings can give you a head start. Knowing where to find additional resources can give you an advantage during tax season and throughout the year.

Employed

Employed taxpayers receive a W-2 from their employer. This form lists the income you were paid. It also details the amount withheld for federal income taxes and social security and Medicare taxes. In addition to your W-2, you may need additional documentation from your employer if you plan to apply for certain tax credits:

Saver’s Credit

The Retirement Savings Contribution Credit, or Saver’s Credit, may apply to employees who made qualified contributions to their employer-sponsored retirement plan. 

Earned Income Tax Credit

The Earned Income Tax Credit, or EITC, can help taxpayers whose income did not exceed a certain threshold, particularly those with children.  

In many situations, taxpayers can also use IRS Free File, a free guided tax preparation platform. Some limitations regarding who can use this software do apply, such as the income threshold. However, this is a great, secure option for taxpayers who qualify.  

Self-employed

Being your own boss can be great, but being your own tax professional can be tricky. After all, the situation for each self-employed professional can be unique. Several factors can qualify an entrepreneur as self-employed:

• Working as an independent contractor and receiving Form 1099-NEC
• Serving as the sole proprietor of your own business or being in business for yourself
• Earning income through investments or rental properties
• Consulting or freelancing for clients on an independent basis

A self-employed taxpayer will generally file Form 1040 and a Schedule C with an annual tax return. You’ll also be required to pay self-employment tax and report this payment when you file your yearly return. A self-employed professional can also take advantage of possible deductions:

• Travel expenses
• Rent for office, equipment, or storage 
• Cleaning and maintenance 
• Legal, professional, and banking fees
• Start-up costs 

Deductions, like a home office or company car, are a good way to save money if you’re self-employed. When you’re running your own business, every dollar counts. A qualified tax professional can also help you navigate the best options for your situation.

Unemployed 

A major factor in whether you're required to file a tax return is if your income meets the minimum requirement for your filing status. In some cases, factors outside income can require you to file, such as receiving advance payments of premium tax credits toward health insurance coverage. Other factors that may mean you’ll have to file include the following:

• If you can be claimed as a dependent on someone else’s tax return
• If you received a distribution into a health savings account (HSA)
• If you owe any taxes on a retirement plan withdrawal that weren’t already withheld 
• If you collected self-employment benefits of $400 or more
• If you think you may be eligible for tax credits like the earned income tax credit (EITC) or the child tax credit

Even if you’re not required to file, doing so can still be a good idea. Not filing can increase your chances of being audited, but more importantly, the IRS has a statute of limitations of three years. However, the clock on that statute only starts when you file for the year. 

Filing even when you don’t have to can also help your bottom line. In addition to tax credits available to you, you may be able to apply deductions to your income retroactively. However, you'll have to file this year to carry over any leftover deductions into next year. A qualified tax professional can help you determine the best way to prepare to use these deductions in the future. 

A combination of situations 

Of course, life is complicated, and your status may have changed at some point this year. Maybe your income changed drastically. Or you may be started the year with a traditional job before leaving to set up your own business. If your status combines different situations throughout the year, consider how each factor could affect your taxes.

Being unemployed for part of the year

If you were only unemployed for part of the year, the loss of your job might have had a varying effect on your income. If you started the year unemployed but found a job later, your situation might be different from someone who lost a job part way through the year.

One important thing to note is that there is currently no federal tax deduction for job-hunting expenses. However, you must report all unemployment compensation you receive from state, federal, or railroad agencies. It’s important to remember that income taxes are not usually withheld from unemployment funds. If you want taxes withheld, you’ll need to request them to be withheld by the agency that’s paying you.

If you lose your job, your income may be lower for the year, meaning you could qualify for the Earned Income Tax Credit (EITC). Be sure to look into other refundable and nonrefundable credits that may apply to your situation.

Having more than one employer

According to the United States Census Bureau, since 1996, about 7.2% of employed individuals have held multiple jobs at once. If you worked two or more jobs simultaneously, remember to collect all records of your wages before Tax Day. However, even if you worked multiple jobs, the IRS only required one return from each taxpayer. Having multiple incomes may push you into a higher tax bracket. 

More than one state

You’ll also want to consider your state taxes. Of course, you’ll file in the state where you claim residency, but situations like moving or working remotely can affect your case. Other factors, like income source and business presence, may also require a return in another state. Some states have reciprocal tax agreements, which allow you to avoid having taxes withheld twice. However, in states without tax reciprocity, you must file a return in both states.

Being employed and self-employed

You're in good company if you have an Etsy shop or sell baked goods at a local co-op while working full-time. Many people work 9-5 jobs during the week, and then they take freelance gigs on the weekend or work on their passion projects in the evenings. 

The trick is to make sure these extra hours and side hustles don’t have a negative impact on your taxes. First, know that you’ll have to report all of the income you’ve earned. If you worked as a formal independent contractor for a client, you’ll probably receive a 1099 form. You might have to track that income if you’re a sole proprietor working with cash and checks.

Extra income, whether a little or a lot, can complicate your federal and even your state taxes. However, you might also qualify for additional deductions or tax benefits depending on how you’re earning that extra income. Be sure to investigate the applicable regulations in your state and consult a tax professional if you have questions.

No matter what, don’t forget to file 

Remember to file your tax return regardless of what happens throughout the year. If you were paid by an employer, received unemployment benefits, or earned self-employment income, you must report it to the IRS. Depending on your situation, you may need to follow additional deadlines, like estimated tax payments or business licenses. 

With tools like ComplYant, you never have to worry about missing a deadline, regardless of your employment status. Whether you’ve got a side gig, run your own business, or are a sole proprietor working for clients, ComplYant has many resources for small business owners, sole proprietors, and anyone with a side hustle. For example, check out a webinar like Tax Filing Tips & Tricks for Gig Workers, Freelancers, and Digital Creators to learn great tax management strategies.