As a consultant for a small business, is it better to file as self-employed or head of household?

As a consultant for a small business, is it better to file as self-employed or head of household?

by Dominic T. Cutuli, CPA | Jan 24, 2018

I have been working as a consultant for a small business, but never filed myself as self-employed. Is it better for me to file my taxes as self-employed instead of a head of household? I have a child as a dependent. My gross is not that high, and there are no mortgage payments.

Without more information about your situation, I am unable to give you any specific recommendations about how to file. Instead, here is some general guidance.

Your primary question relates to what filing status to use, so I will address that first. “Self-employed” is not a filing status choice, and I will cover this issue later.

The IRS offers these seven facts to help you choose the best filing status for you. You can also review IRS Publication 501 for more details.

  1. Marital Status. Your marital status on the last day of the year is your marital status for the entire year.
  2. If You Have a Choice. If more than one filing status fits you, choose the one that allows you to pay the lowest taxes.
  3. Single Filing Status. Single filing status generally applies if you are not married, divorced, or legally separated, according to state law.
  4. Married Filing Jointly. A married couple may file a return together using the married filing jointly status. If your spouse died during 2017, you usually may still file a joint return for that year.
  5. Married Filing Separately. If a married couple decides to file their returns separately, each person’s filing status would generally be married filing separately.
  6. Head of Household. The head of household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.
  7. Qualifying Widow(er) with Dependent Child. This status may apply if your spouse died during the prior two years, you have a dependent child, and you meet certain other conditions.

If you qualify for head of household status, that would be more beneficial than claiming a single filing status. If you are married, you must choose between the married statuses.

You would be considered self-employed if you are not compensated as an employee and don’t receive an annual Form W-2. If this is the case, you would be required to pay self-employment tax, in addition to income tax on your income, net of business expenses. You may also be required to make estimated quarterly tax payments to the federal, state, and local taxing authorities. Assuming you don’t have ownership in the small business that pays you, your business income and expenses would be reported on Form 1040 Schedule C for federal tax purposes. Visit the IRS website for details on these requirements.

I recommend that you consult with a CPA who can provide you with further explanation of these topics and specific recommendations.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Dominic T. Cutuli, CPA, is a principal with H2R CPA in Pittsburgh.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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