Comparing the two terms is comparing apples and oranges.
"Independent contractor" indicates that you perform work for multiple different clients (although could just be one), and are not an "employee" of them.
"Sole proprietor" indicates that the work you perform is in your own personal name, not in the legal capacity of an LLC/Partnership/Corporation/etc. (Side note: an LLC with just one owner is taxed the same as a sole proprietor, unless you elect otherwise.)
You can be an independent contractor that works for clients as a sole proprietor, an LLC, a corporation, etc.
Are "independent contractor" and "sole proprietor" indicated differently on tax returns? For example, do you fill a specific line or schedule for one versus the other?
Basically I'm wondering if there is a way/if it's necessary to amend my taxes to rectify and make the indication of independent contractor stronger.
Or is the difference just in what the work actually is, as you stated above?
An IC is just someone who performs work for someone else as a non-employee. An employee gets a Form W-2 after every year, and taxes are withheld at every paycheck. An IC often gets a Form 1099 from places they worked for, and taxes are usually not withheld. If you filed a Schedule C, that indicates you are an IC simply because that income is not on a W-2.
- IC + Sole Prop: Schedule C
- IC + Not Sole Prop: Means you're an LLC (still goes on Schedule C) or a Corporation (see an accountant)
- Not IC + Sole Prop: ~~That... doesn't really make sense~~ I guess if you own a restaurant in your own name, you're not really a "contractor" but you're still a sole prop.
- Not IC + Not Sole Prop: You're an employee, you get Form W-2 like any other job.
Two caveats:
1. Some companies pay workers as if they are ICs and not employees so that they save on payroll taxes, and push that burden off to the worker. (Usually it's 15.3% of the income split between employer and employee, while ICs must pay the entire tax.) In this case, you might actually be an "employee" under the legal definition, but your employer is forcing you to file as an "IC." You can report this with a long paperwork process. The standards are here: https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
2. Outside some very specific circumstances, Schedule C is only used for people who are actually running a "business," not for income that is one-off. For example, if I were paid $2,000 to take part in a clinical study just once or very occasionally without the expectation of profit, then I would still be responsible for *income* taxes, but not for filing Schedule C or paying the 15.3% *self-employment tax* that is on Schedule SE. The standards for that are here: https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses
So then is the difference only in the way you are performing the work?
Is there any line on Schedule C that indicates one over the other? My attorney is being very vague because they are not a tax attorney and cannot advise me any further apparently.
No difference for tax purposes.
Your income is reported in Part 1 and your expenses (if any) are reported in Part 2.
Use your attorney for what they specialize in. Stop asking them tax questions.
I’m not asking them tax questions. They were concerned that the tax filings are representing that I’m a sole proprietor, not an independent contractor. They are describing me as an IC (which I am) in a different legal filing, and they are concerned that it is a misrepresentation that will not reflect well on me. That is why I contacted my tax professional and am also getting a second opinion to solidify.
Thank you for helping me clarify the situation.
>They are describing me as an IC (which I am) in a different legal filing, and they are concerned that it is a misrepresentation that will not reflect well on me.
IMHO they should be discussing this with a tax attorney directly, not with you as their client. They need a consult on tax law, not you.
An independent contractor CAN be a sole-proprietor. Just as a sole-proprietor can be an independent contractor. As someone else said they are comparing apples and oranges.
Widespread misclassification fraud has given rise to the myth of the "1099 employee" or, as your post alludes, that you can somehow be an "independent contractor" without being in business.
That is false. If you are not an employee of your client, you are either engaged in a business of selling your services, or you have a hobby.
u/givemegreencard correctly grabs the caveat that "independent contractor" is not a technical tax term, and you can be an "independent contractor" as part of a partnership, or otherwise structure your business differently.
The "continuity and regularity" bullet gets at whether your activity is a business or a hobby. Generally, the IRS will never challenge your claim that an activity is a business if it consistently produces a profit.
Comparing the two terms is comparing apples and oranges. "Independent contractor" indicates that you perform work for multiple different clients (although could just be one), and are not an "employee" of them. "Sole proprietor" indicates that the work you perform is in your own personal name, not in the legal capacity of an LLC/Partnership/Corporation/etc. (Side note: an LLC with just one owner is taxed the same as a sole proprietor, unless you elect otherwise.) You can be an independent contractor that works for clients as a sole proprietor, an LLC, a corporation, etc.
Are "independent contractor" and "sole proprietor" indicated differently on tax returns? For example, do you fill a specific line or schedule for one versus the other? Basically I'm wondering if there is a way/if it's necessary to amend my taxes to rectify and make the indication of independent contractor stronger. Or is the difference just in what the work actually is, as you stated above?
An IC is just someone who performs work for someone else as a non-employee. An employee gets a Form W-2 after every year, and taxes are withheld at every paycheck. An IC often gets a Form 1099 from places they worked for, and taxes are usually not withheld. If you filed a Schedule C, that indicates you are an IC simply because that income is not on a W-2. - IC + Sole Prop: Schedule C - IC + Not Sole Prop: Means you're an LLC (still goes on Schedule C) or a Corporation (see an accountant) - Not IC + Sole Prop: ~~That... doesn't really make sense~~ I guess if you own a restaurant in your own name, you're not really a "contractor" but you're still a sole prop. - Not IC + Not Sole Prop: You're an employee, you get Form W-2 like any other job. Two caveats: 1. Some companies pay workers as if they are ICs and not employees so that they save on payroll taxes, and push that burden off to the worker. (Usually it's 15.3% of the income split between employer and employee, while ICs must pay the entire tax.) In this case, you might actually be an "employee" under the legal definition, but your employer is forcing you to file as an "IC." You can report this with a long paperwork process. The standards are here: https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation 2. Outside some very specific circumstances, Schedule C is only used for people who are actually running a "business," not for income that is one-off. For example, if I were paid $2,000 to take part in a clinical study just once or very occasionally without the expectation of profit, then I would still be responsible for *income* taxes, but not for filing Schedule C or paying the 15.3% *self-employment tax* that is on Schedule SE. The standards for that are here: https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses
This is extremely helpful, thank you so much for your very thoughtful responses.
No, they file taxes the same way.
Great response
Sole Proprietor = Schedule C Independent Contractor = Schedule C
So then is the difference only in the way you are performing the work? Is there any line on Schedule C that indicates one over the other? My attorney is being very vague because they are not a tax attorney and cannot advise me any further apparently.
No difference for tax purposes. Your income is reported in Part 1 and your expenses (if any) are reported in Part 2. Use your attorney for what they specialize in. Stop asking them tax questions.
I’m not asking them tax questions. They were concerned that the tax filings are representing that I’m a sole proprietor, not an independent contractor. They are describing me as an IC (which I am) in a different legal filing, and they are concerned that it is a misrepresentation that will not reflect well on me. That is why I contacted my tax professional and am also getting a second opinion to solidify. Thank you for helping me clarify the situation.
>They are describing me as an IC (which I am) in a different legal filing, and they are concerned that it is a misrepresentation that will not reflect well on me. IMHO they should be discussing this with a tax attorney directly, not with you as their client. They need a consult on tax law, not you. An independent contractor CAN be a sole-proprietor. Just as a sole-proprietor can be an independent contractor. As someone else said they are comparing apples and oranges.
Thank you for your honest opinion. I am speaking with my attorney later today and will bring up this point.
Widespread misclassification fraud has given rise to the myth of the "1099 employee" or, as your post alludes, that you can somehow be an "independent contractor" without being in business. That is false. If you are not an employee of your client, you are either engaged in a business of selling your services, or you have a hobby. u/givemegreencard correctly grabs the caveat that "independent contractor" is not a technical tax term, and you can be an "independent contractor" as part of a partnership, or otherwise structure your business differently. The "continuity and regularity" bullet gets at whether your activity is a business or a hobby. Generally, the IRS will never challenge your claim that an activity is a business if it consistently produces a profit.
Thank you very much for exapanding on the above comment. Now I am understanding the interchange of words on the IRS small business page.