Hired as a Independent contractor by former employer.

[englebert]

I lost my job in September 2020 when the company closed the office in our city.  The same company hired me to do work remotely for another office, as an independent contractor in March of 2021. During this time I did not receive benefits, and was paid on a monthly retainer  which amounted to a fraction of my former salary. In July the hired me as a full time remote employee. The job I am doing now has some similarities to the job I lost in 2020, but it is not the same. For instance, the old job was a managmenent position, and this one is not. The salary is also quite a bit  lower. As I'm going through the deductions for the four months I was self-employted, it appears that I am being penalized for working freelance for a former (and future) employer. This doesn't make sense, because I definitely wasn't an employee during the time I was working as a contractor. I'm a bit cofnused. Any ideas?

[Vanessa A]

When you work as an independent contractor, you are in a way penalized.  The money you earned during that time is subject to self-employment taxes, plus, you did not have an employer withholding your federal taxes or state or local taxes while you were an independent contractor.  So, where you normally wouldn't have noticed all of the taxes because they come out every week and your employer pays part of them, when you are self-employed, you notice it a lot more because you have to make a "bulk" payment instead of small weekly payments in addition to the extra 7.65% you pay when you are self employed.

One thing that can help is during the time you were self-employed, you may be able to deduct certain business expenses like a home office if it was used regularly and exclusively for work or other expenses you incurred in order to perform your job. As you walk through TurboTax Self-Employed, you will be able to look at all the expenses you may be able to deduct. 

[englebert]

Thanks! But my issue is that it seems that the IRS won't allow me as much in self-employmen deductions because the  work I didas an independent contractor was for my former employer.  If the issue is whether I was truly self employed - I defintely was. I had been terminated, and was completely our of work for a few months, then contracted to do freeance work. Sorry, I hope this isn't too convoluted...

[VolvoGirl]

If you are filling out Schedule C for it then you can enter all the expenses.  Where isn't it letting you?  Should you have a loss after expenses?

If you are not showing a loss on Schedule C.

Some expenses, such as home office or section 179 depreciation can only be used to reduce your schedule C taxable income to zero, and not to create a loss. Excess deductions for these carry over to the next year.  And you have to answer yes to both questions about exclusive and regular use, not just one.  The area of your home office must be used regularly and exclusively for business to deduct it.

Or you checked the box on 32b saying Some Investment is Not at Risk.

[DawnC · Accepted solution]

But the IRS will allow you to deduct your self-employment expenses against your 1099-NEC income.    The money you were paid on Form 1099 gets reported on Schedule C - you can deduct expenses related to that income on the same Schedule C.   You can't include expenses you incurred for the W-2 income, but you can deduct the expenses related to the 1099 income.   

I think you are having an issue/question with the Qualified Business Income Deduction.    You can take all the other self-employment deductions, but the QBI deduction is tricky.   If your Schedule C business meets the definition of a trade or business under Section 162, it qualifies for QBI on that income, with some exceptions.   Income you receive from a former employer is generally not eligible for the deduction; that is why answering YES in TurboTax to the 'former employee' question disqualifies you for the deduction.    However, the income may still qualify.     Here is the IRS language that explains whether or not you should indicate this income is from a previous employer.   See page 73.   

WARNING

The IRS further states elsewhere in the ruling that there can be substantial penalties if you claim this income as qualified QBI and the IRS, upon audit, determines it's not.   

(3) Presumption that former employees are still employees--(i) Presumption. Solely for purposes of section 199A(d)(1)(B) and paragraph (d)(1) of this section, an individual that was properly treated as an employee for Federal employment tax purposes by the person to which he or she provided services and who is subsequently treated as other than an employee by such person with regard to the provision of substantially the same services directly or indirectly to the person (or a related person), is presumed to be in the trade or business of performing services as an employee with regard to such services. This presumption may be rebutted upon a showing by the individual that, under Federal tax law, regulations, and principles (including common-law employee classification rules), the individual is performing services in a capacity other than as an employee. This presumption applies regardless of whether the individual provides services directly or indirectly through an entity or entities. 

The answer to that question in TurboTax will determine whether the deduction is allowed or not.   

[englebert]

Thank you. I think this was what I was looking for. Even though I don't love the answer, I'm thankful to have one. I was too employed for QBI but not employed enough to avoid self-employment tax, or to get any sort of benefits. 😉  Thanks for providing clarity!