What tax differences exist between being employed vs. self-employed? Filing help needed!

What about health insurance? Is that handled differently between the two types of employment? My cousin is in a similar situation and is trying to figure out if she can deduct her health insurance premiums.

Health insurance is definitely handled differently. As an employee, health insurance premiums paid through an employer plan are typically pre-tax and not deductible separately since they're already reducing taxable income. For self-employment, if your cousin isn't eligible for employer coverage (through a spouse or another job), she can potentially deduct health insurance premiums as an adjustment to income on the 1040 (not on Schedule C). This is called the self-employed health insurance deduction. It reduces income tax but not self-employment tax. There are some specific requirements though, so she should check if she qualifies based on her business profit.

Does taxr.ai actually help determine which expenses count as business vs personal? That's where I keep getting stuck. Like, can I deduct my home internet if I use it for both my day job and my Etsy shop?

I've heard about these AI tax tools but have been hesitant. How accurate is it with more complicated situations? I'm both employed and do real estate on the side, so I deal with Schedule C and Schedule E stuff.

It absolutely helps with splitting business vs. personal expenses! You can allocate percentages for mixed-use items like internet, and it explains the "ordinary and necessary" business expense rules in plain English. I was able to correctly deduct 60% of my internet costs based on legitimate business usage. For more complicated situations including real estate, it handles Schedule E requirements too. My brother uses it for his rental property and W-2 income. The system is built on actual tax code and updated for 2025 rules, so it catches all those little details that are easy to miss when you have multiple income sources.

How does this actually work though? Does it just call the IRS for you? Couldn't I just do that myself and save whatever they're charging?

Sounds too good to be true. The IRS wait times are notoriously horrible. I really doubt any service can magically bypass their phone system. Are you sure this isn't just some scam to collect fees for something that doesn't work?

It doesn't just call the IRS for you - it uses a system that navigates the IRS phone tree and stays on hold in your place. Once an agent is about to pick up, it calls your phone and connects you directly to the agent. It's basically like having someone wait on hold for you. I had the exact same skepticism initially! But it's not bypassing anything - you're still in the same queue as everyone else, but you don't have to be the one sitting there listening to the hold music for hours. It saved me from having to redial multiple times after getting disconnected, which was happening constantly when I tried calling myself.

Are the contribution limits combined if you have both types of accounts? Like if I max out my work 401k can I still contribute the full amount to a SEP IRA from my side hustle?

The limits work differently depending on which accounts you're using. Employee 401(k) contributions are capped at $23,000 for 2025 (plus catch-up if you're over 50), and this limit applies across ALL your 401(k) accounts combined, whether from employment or self-employment. However, the employer portion of contributions works differently. For a Solo 401(k) from self-employment, you can contribute as both employee AND employer. While your employee contributions are limited as mentioned above, the employer portion can go up to 25% of your net self-employment income, with total contributions capped at $69,000. SEP IRA limits work similarly to the employer portion.

Technically, clients should request a W-9 from you before they pay you. The W-9 gives them your info (name, address, SSN or EIN) that they need to properly issue your 1099-NEC. But in reality, many smaller clients might not be familiar with the process and might not request it until year-end or might forget entirely.

Wow, that's a really helpful tip! My brother is just starting out with the freelance work, so that could apply to him. Do you know if there's any specific form he needs to fill out to claim this exemption, or does it automatically calculate in tax software?

It should calculate automatically in most tax software. You still report all income on Schedule C, but the self-employment tax (on Schedule SE) only kicks in when your net profit exceeds $400. Keep in mind though that he'll still owe regular income tax on that amount even if it's under $400, just not the additional 15.3% self-employment tax portion. Make sure he keeps good records of all business expenses to maximize deductions - every dollar of legitimate business expense reduces both income tax and potentially self-employment tax too!