I never thought of myself as a businessman- until 2015 when the IRS told me I was, and that I therefore needed to pay them more money to cover the self-employment tax. Naturally I was confused and angry about this at first, but in the long run it turns out they were doing me a favor.
If you make a tiny amount of 1099-MISC or 1099-NEC income on occasion, the IRS is probably* fine with characterizing this as ordinary income from a hobby. But if you earn 1099 income at all regularly, they will likely want to characterize you as a business, and want you to pay a self-employment tax similar to the payroll tax that W2 employees pay (though it will look higher to you, since you will pay both the employee and employer halves of the tax). If you make an intermediate amount of 1099 income, you might have the choice of whether to call this hobby income or business income; I had thought it would be better to avoid the complications and extra taxes of being a business, but it turns out that being a business unlocks new opportunities for deductions than can far outweigh the self-employment tax.
For example, a home office, business-related travel expenses, and advertising expenses can be deductible. For a writer, this could cover conferences, website expenses, computers, and much more. It also means you can start a SEP IRA– in addition to a personal IRA if you like. This alone could allow you to deduct thousands of dollars in income per year (technically up to $69k if you make at least $276,000 per year in business income, though if you make that much, you’re the one who should be giving me advice). The SEP IRA has the advantage over a personal IRA of a much higher income limit and, potentially a higher contribution limit, though again the beauty is that you don’t have to choose- you can just do both.
While this post is mainly about business, I also think regular IRAs might still be underrated. I didn’t start one until 2022, but I should have done it much earlier. First I thought I was too poor (low income, then higher income but with student loans to pay off first), then I thought I was too rich (above the income limits). It turns out though that you can still start a personal IRA even when you are above the income limits- it just means you only get one tax benefit instead of two, but that one tax benefit is still pretty good.
Every IRA has the benefit of investments growing tax-free; if you meet the income limits then IRAs get the additional benefit of avoiding income taxes either when you put the money in (for traditional) or when you pull it out (for Roth). But even if you “only” get the benefit of tax free growth, that can still be a huge monetary benefit depending on your investment strategy. It is also a big time benefit- every taxable brokerage account means at least one** extra tax form to deal with every year, while an IRA account avoids this.
Another great benefit to IRAs (SEP or regular) is that you can still start one now and make contributions for the 2024 tax year. I was just doing my taxes and kicking myself for not doing some things differently back in 2024 when it would have helped; but IRAs are like a form of time travel where you can still go back and fix things, at least until April 15th.
*Disclaimer- Not official tax advice, I’m not an accountant, I’m just a 37 year old guy with lifetime 1-1-1 record against the IRS. Three times they have told me I owed them more than I paid on a tax return. Once I won (I told them I owed nothing and explained why, and they agreed). Once I lost (I told them oh shit, you’re right and paid them). For the story I started this post with, I call it a draw (they told me I owed them X, I told them I owed nothing and explained why, then they told me I actually owed them 1/3X and I just paid it).
**More than one if like me you accidentally invest in a partnership and as a result get a K-1 on top of the usual 1099-DIV for that overall brokerage account
HT: Trinette McGoon
Economist Writing Every Day 