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The Basics

Defining Your Entity

The tax code is complex and based in large part on the type of business you have, so defining your entity is the first step to untangling your tax requirements
tl;drIf you receive a W-2, you're an employee. If you receive a 1099-MISC, you're an independent contractor and need to handle your own tax situation.

Employee vs. Independent Contractor

The first step will be determining your classification. If you aren’t clear on what your employment status is, first consider this:

  • Do you receive a W-2? If so, you’re a full-time or part-time employee, which means you don’t have to worry about your taxes for this position. Your employer has you covered.
  • Do you receive a 1099-MISC? If so, you’re an independent contractor with the company and will need to handle your own tax situation.

If you haven’t received either of these tax forms yet, you can ask your employer what your official designation is.

Sole Proprietor

A sole proprietor is often the first step in venturing out on your own business. Sole proprietors report their expenses on a Schedule C report, and business profit and loss appears on the personal tax return.

Sole proprietorships don’t require you to file with the state to form and are easy to form and operate. However, you’ll be personally liable for what happens in the business. As you operate under this entity, you’ll need to fill out any or all of these forms to ensure you’ve handled your tax burden.

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