You cannot avoid paying taxes if you are self-employed; the most you can do is reduce your tax bill.
Change Business Structure
One of the most popular ways to avoid or limit SE tax is to change the business structure. All the income from a sole proprietorship is likely to be subject to the SE tax because the owner and business are essentially the same entity.
If you have no business income or a business loss for a specific year, you don't have to pay self-employment tax for that year, but then you also usually can't get credit for Social Security benefits for that year.
Not reporting self-employment is deemed a federal and state felony and is a form of tax evasion. You may face a fee for the amount unpaid, interest charged, and even criminal prosecution. Self-employment income received through contract payments must be stated on your individual income tax return.
Who Must Pay Self-Employment Tax? You must pay self-employment tax and file Schedule SE (Form 1040 or 1040-SR) if either of the following applies. Your net earnings from self-employment (excluding church employee income) were $400 or more. You had church employee income of $108.28 or more.
You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.
You do not need to pay self-employment tax on income that you earn from an employer if the employer withheld payroll taxes. Other situations may require you to pay self-employment tax. For one, you still need to pay even if you are a U.S. citizen employed by a foreign government.
LLC owners choose to lessen their individual self-employment tax burden by electing to have the LLC treated as a corporation for tax purposes.
Additionally, you have to consider the state you live in. For example, if you live in California, they have a legal right to collect state taxes up to 20 years after the date of the assessment!
So if you ignore one and don't report the income, the IRS will generally flag your tax return. And if the IRS receives multiple 1099s that you don't report, the agency might get suspicious. If it digs deeper and finds that you've intentionally been underreporting your income, you could be slapped with a huge penalty.
You can't avoid self-employment taxes entirely, but forming a corporation or an LLC could save you thousands of dollars every year. If you form an LLC, people can only sue you for its assets, while your personal assets stay protected.
The Internal Revenue Service requires anyone making $400 or more in self-employment income to file a tax return. The return must include a Schedule SE, which you use to calculate how much self-employment tax you owe.
Final Tips on 1099 vs LLC
While you can certainly start working as a sole proprietor, an LLC offers significant advantages to protect your assets from liability. Likewise, electing to make the LLC an S-corp can offer additional income tax savings and advantages.
If payment for services you provided is listed on Form 1099-NEC, Nonemployee Compensation, the payer is treating you as a self-employed worker, also referred to as an independent contractor. You don't necessarily have to have a business for payments for your services to be reported on Form 1099-NEC.
Tax evasion is the illegal non-payment or under-payment of taxes, usually by deliberately making a false declaration or no declaration to tax authorities – such as by declaring less income, profits or gains than the amounts actually earned, or by overstating deductions.
Each year, about 5% of taxpayers fail to file their taxes, with the top two reasons being that they are overwhelmed by the tax prep's complexity or simply objecting to paying income taxes, according to David Ragland, a certified financial planner and CEO of IRC Wealth.
Generally, if your total income for the year doesn't exceed certain thresholds, then you don't need to file a federal tax return. The amount of income that you can earn before you are required to file a tax return also depends on the type of income, your age and your filing status.
The self-employment tax rate — a combination of Social Security and Medicare taxes — is 15.3% for 2023 and 2024. You'll use Schedule C to calculate net earnings and Schedule SE to calculate how much tax you owe. You can deduct 50% of your self-employment tax on your income taxes.
Self-employment taxes
The Social Security portion of the tax is paid on the first $160,200 of employment income in 2023. This threshold increases to $168,600 for 2024. Unfortunately, when you are self-employed you pay both portions of these taxes—for a total of 15.3 percent.
As a sole proprietor, an owner's draw is your only option for paying yourself as there is no distinction from a tax perspective between personal and business expenses. If your business is an LLC and you don't have any other employees, you'll also need to use an owner's draw in order to pay yourself from your business.
The short answer is yes, but the process of getting a refund is dependent on a number of factors, including the type of business entity, the amount of taxes paid, and the types of tax deductions claimed.
Most U.S. citizens or permanent residents who work in the U.S. have to file a tax return. Generally, you need to file if: Your gross income is over the filing requirement. You have over $400 in net earnings from self-employment (side jobs or other independent work)
The self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. However, the Social Security portion may only apply to a part of your business income. That's because of the Social Security wage base. For 2022, the Social Security wage base is $147,000 and increases to $160,200 in 2023.
A dependent child who has earned more than $13,850 of earned income (tax year 2023) typically needs to file a personal income tax form. Earned income includes wages, tips, salaries, and payment from self-employment. This threshold increases to $14,600 for 2024.
One of the most advantageous ways to get paid from your LLC is as a W-2 employee. Using this method, you will receive a regular paycheck as would an employee of any business. This is a good way to have a predictable income for your personal finances.