Do I need to pay self-employment tax if converted to w2

[GeorgeKa]

I graduated college in May 2021 and started a job in June.  I was hired in a trial basis, with the intent to become a full-time employee.  My employer required that I submit weekly invoices for all of 2021 and I received a 1099-nec.  I became a full-time employee in for 2022 and received a W2 for that tax year.  I received an IRS notice CP200 stating I owe self-employment tax for the 2021 income.   Is this correct given that I was hired full time and am still employed at the same company?  The only difference was the submission of invoices.  I did not start a business.  Is it worth me pursuing an exception to paying the self-employment tax?

[xmasbaby0]

Each tax year is separate.   The fact that you became a W-2 employee for tax year 2022 has no bearing on tax year 2021.  What you say is that for 2021 you were paid as an independent contractor and received a 1099NEC.   If you received even $400 of income as an independent contractor for 2021, you have to enter that on a 2021 tax return and pay self-employment tax for Social Security and Medicare, and perhaps pay ordinary income tax, depending on how much you earned.

If you did not file a 2021 return, or prepared 2021 incorrectly then you either need to prepare a return for 2021 or amend the return you filed.   

https://ttlc.intuit.com/community/self-employed/help/how-do-i-report-income-from-self-employment/00/...

https://ttlc.intuit.com/community/self-employed/help/what-is-the-self-employment-tax/00/25922

https://ttlc.intuit.com/questions/2902389-why-am-i-paying-self-employment-tax

https://ttlc.intuit.com/questions/1901340-where-do-i-enter-schedule-c

https://ttlc.intuit.com/questions/3398950-what-self-employed-expenses-can-i-deduct

https://ttlc.intuit.com/questions/1901110-do-i-need-to-make-estimated-tax-payments-to-the-irs

See this TurboTax support FAQ for amending a tax return - https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-return/amend-change-correct-return-a...

[VolvoGirl]

How did you report the 2021 income?   Or did you leave it off your return?  Yes you need to report it on Schedule C as self employment income.

You pay Self Employment tax (Scheduled SE) on a Net Profit of $400 or more on Schedule C in addition to regular income tax on it.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

[GeorgeKa]

I reported it and paid income tax.  I did not file the sched C and thus no self-employment tax was paid, nor were any of my expenses deducted as I thought I was an employee.

I guess I would pay the SE tax per the CP2000 and then file an amended return to get my expenses accounted for, which would result in a refund of some amount.  Is there a better course of action?

[VolvoGirl]

But how/where did you report it instead of on Schedule C?  What line is it on your tax return?  You need to amend to delete it from the wrong place and fill out Schedule C for it.  By having a Net Profit on Schedule C counts as Earned income and may qualify you for the EIC earned income credit.   And would have made you able to contribute to a IRA, but that's too late now.  

[Opus 17]

@GeorgeKa 

If you have accurate records of your expenses, and if you can get your taxes in order before the expiration date on the notice, then it would be a better route to prepare an amended 2021 tax return which reports the self-employment income as well as the expenses on schedule C and schedule SE.  The expenses will reduce the SE tax that you owe. Then, send a letter to the office that sent you the notice in which you acknowledge that you made a mistake and you should have reported self-employment income, but that with the inclusion of your expenses, the SE tax that you owe is less than what they billed you for. Include the amended return and payment for the adjusted amount of tax. (Mail the amended return to the office along with your letter, not to the normal address for amended tax returns.)

If you pay the entire amount from the notice, and then try to file an amended tax return to adjust it, that paperwork becomes much more complicated.

[Opus 17]

Just to add in confirmation,

If you were being used as a contractor for the first few months, you would indeed be "self-employed" under the IRS definition, no matter if you call it a small business, side gig, private contractor, freelancer, or whatever.

Unless you were hired as a W-2 employee on January 1, 2022, it is possible that you were a freelancer for part of 2022 (and required to file a schedule C and SE for that portion of your income) as well as being a W-2 employee for the rest of the year.  This situation is not unprecedented, although Turbotax can sometimes get confused when you have a 1099-NEC and a W-2 from the same employer in the same year.

The key to understand is than an employee has a different relationship with their employer than a freelancer does.  If the relationship actually changed from freelancer to employee, then it would be appropriate to handle it with a 1099 for part of the year and a W-2 for the rest of the year.  But if your relationship did not change, then the work did not change even though they changed the paperwork, and this can be a source of problems.  For information on the difference between a freelancer and employee, see here.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

https://www.irs.gov/newsroom/worker-classification-101-employee-or-independent-contractor

https://www.irs.gov/businesses/small-businesses-self-employed/manage-taxes-for-your-gig-work

[GeorgeKa]

Thank you all for your help.  I appreciate it.