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Last year I freelanced year round in the U.S. For work performed from Jan-Oct I received a 1099-NEC (Non-employee compensation tax form) from my clients. However, from Nov-Dec I worked for a new client who offered to withhold taxes from my checks, and I liked the idea. So I filled out the W-4 they sent me, and I received a W-2 in the mail the following spring.

The problem is that now my tax preparer says that I only qualify for home office expense deductions if I'm self-employed. Therefore, the 2-month period where I received W-2 income cannot be included because that technically makes me an employee so no longer self-employed. Is this true? I was still working on a freelance basis for 2 months, and there were no benefits received other than the convenience of having my taxes withheld for me. All my self-employment & home office expenses remained the same.

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Therefore, the 2-month period where I received W-2 income cannot be included because that technically makes me an employee so no longer self-employed. Is this true?

If they are giving you a W-2, and had you fill out a W-4, then you are not a freelancer, you are an employee. That means the state and federal government require them to provide benefits if you have enough hours.

I was still working on a freelance basis for 2 months, and there were no benefits received other than the convenience of having my taxes withheld for me. All my self-employment & home office expenses remained the same.

The rules about deducting expenses, become more complex if you are an employee. Recent tax changes have basically eliminated the ability to deduct expenses for stuff. To deduct expenses for office space, there are tests you have pass regarding exclusive use of the space, and for the convenience of the employer. Your tax preparer can help determine if you can deduct the space.

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  • That's good to know. Then what's the benefit of letting my client withhold taxes instead of doing it myself? It looks like I only lose the ability to deduct expenses with no benefit in return.
    – Marquizzo
    Nov 18 at 19:51
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    @Marquizzo By being an employee, you are avoiding self-employment tax. Your employer is paying some social security tax on your behalf instead of you paying the SE tax. Nov 18 at 20:45
  • @Marquizzo This is about being an employee versus being a contractor. That your employer withholds taxes is just one of the many things that change based on that. Another is that your employer pays payroll tax and you don't pay self-employment tax. There are various other differences as well -- in particular, you don't have a business if you are an employee. Nov 19 at 9:38
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    @Marquizzo One other point -- as a general rule, freelancers get paid more than employees for a variety of reasons, including that employers pay payroll tax while freelancers have to pay self-employment tax. So if your employer paid you freelancer rates as an employee, you probably made out pretty well. If they paid you some lower "equivalent" rate, then you probably got a bit screwed. Nov 19 at 9:49

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