1099-NEC Freelance vs Business

[investmentlife]

[Topic is now in Personal Finance (Not Investing). Thank you to the member who alerted us - mod mkc]

Received a 1099-NEC for contract work, and have been the past 5 years. I am using H&R Block - went through 2 scenarios and noticed a large tax difference if - (1) Classify income as in the 1099-NEC section vs saying I have a business (though it is still classified as 1099-NEC). Reason for my initial curiosity is because I wanted to contribute additional funds to a SEP IRA (forget a minute for Roth, Trad IRA, etc). Under the latter scenario, H&R block doesn't have a section to deduct SEP contributions but does under the Business scenario. Why is the business section at a much higher tax rate? Thoughts? Thanks

[brawlrats]

When you say "freelance" do you mean as a hobby?

Marking it as a business would imply self-employment taxes (FICA/Medicare) are due, so it is calculating another 15.3% on your net income.

So the question is...do you have a business or is this a hobby? If you have a business, make sure you are deducting any related expenses. Typically (though I can't guarantee always), "contract work" is considered a business and self-employment taxes are due.

[MP123]

Generally speaking, if you get a 1099-NEC (non-employee compensation) you need to report it as business income. This means you will owe self-employment tax, but you can also contribute to a SEP-IRA or solo401k.

[billaster]

Don't get hung up on the idea that "business" means some formal declaration or registration. It's pretty simple. If you are doing work for hire and are not a W-2 employee, you have a business and the income is business income. Unless you set it up otherwise, you are doing business under your own name and using your own social security number and are self-employed.

You fill out Schedule C to report your income and fill out Schedule SE to calculate your self-employment tax.

[neurosphere]

Received a 1099-NEC for contract work, and have been the past 5 years.

How have you been reporting this income in the past? That would be helpful to know, and may help us give you guidance (in addition to the great responses already given).

[Hyperchicken]

You fill out Schedule C to report your income and fill out Schedule SE to calculate your self-employment tax.

Also form 8995 for QBI deduction - got to use it while it lasts (it is set to expire in 2026 under the current law, I believe). My understanding is that anyone with SE income and AGI under certain (fairly high) limit is eligible.

[peteyboy]

If I’m not mistaken, only the employer is allowed to make a contribution to a SEP. Perhaps that’s why you can’t see the option if no business. Additionally, I believe the employer contribution is limited to no more than 25% of the employee’s pay.