Self-Employed: Definition, Financial & Tax Implications

What Does It Mean to Be Self-Employed?

A self-employed individual is an autonomous workers who doesn’t work for a specific employers. They earn their income by contracting with a business or trade directly.

With self-employment, independent contractors can work remotely or engage with clients/customers in person (depending on the industry or services they offer).

Since they’re independent from a corporation or employer, they lack employment benefits and support, and incomes can be inconsistent.

This type of employment is saturated in multiple industries and jobs, so being self-employed involves employment of different sorts—be it in the creative or professional industry.

What Are 3 Main Types of Self-Employment?

A self-employed person can be a sole worker or part of an arrangement between business owners. Here are the self-employment types explained in detail:

1. Independent Contractor

The definition of a contractor is a person or non-employee hired by another individual or organization to fulfill a particular project or task within a fixed period (long or short-term).

The exact definition applies to independent contractors. One study suggests that 15% of workers are independent contractors. These individuals usually market in-demand skills and services.

One advantage of being an independent contractor is you can work for multiple clients or projects simultaneously.

2. Sole Proprietors

Sole proprietors are business owners solely liable for all profits, operations, and decision-making for a business. This employment type is common for small business owners.

Sole proprietors can hire employees, leaving them responsible for remitting their taxes and compliance with other employment regulations.

3. Partnerships

For a partnership-owned business, two or more people share responsibilities to manage the business. Unlike sole proprietorships, all partners have their share of financial contributions and liabilities, but their roles can vary depending on the type of partnership.

For example, in a limited partnership, the amount of liability for every partner will depend on their initial investments in the business. Their involvement with daily operations can be limited, too.

Is Self-Employed an Occupation?

Yes, self-employment is considered a form of occupation. You can refer to the U.S. Bureau of Labor Statistics to learn about the different worker classifications to which self-employment professions and roles fall. Examples are business and arts and design occupations.

Self-Employment vs. Regular Employment

Unlike regular employees who only focus on their duties or the responsibilities implied in their job description, self-employed individuals perform more responsibilities and administrative roles. That way, they’re comparable with employers.

Self-employed individuals are responsible for managing all aspects of a business, such as marketing, sales, administrative tasks, income or financial management, and tax paying.

Since they don’t receive any benefits or insurance and aren’t protected by labor regulations, they’re solely responsible for fulfilling tax responsibilities, paying for medical insurance, and more.

They single-handedly take care of processes that determine the success and future of the business, which includes growth strategizing, building networks, and keeping up with industry trends to remain in the competitive market.

What Are Some Examples of Self-Employment?

Careers and roles range from skilled and professional services to creative and entrepreneurial ventures. Consultants, freelancers, and gig workers are considered self-employed.

Here are some of the top self-employment examples:

1. Freelancers

These individuals are skilled in creative and technical roles, and freelance workers don’t need a degree to qualify. They primarily work on a project basis.

Writers, graphic artists, marketing specialists, and virtual assistants are the best examples. These individuals often work remotely and offer services to multiple clients at the same time.

2. Gig Workers

Examples are workers who offer delivery or driving services and completion of everyday tasks like cleaning, walking the dogs, and babysitting.

These types of workers take on short-term but in-demand tasks or services and use online platforms or apps to source and connect with potential clients or customers.

3. Entrepreneurs or Business Owners

These individuals are innovators, creating solutions, selling products or services to fulfill a need, or commercializing a trend for profit.

As an entrepreneur or business owner, you develop a business plan, take on financial risks, acquire resources, and oversee operations or management to ensure company success.

4. Influencers and Content Creators

Influencers and content creators are integral elements of the marketing industry, using their social media platforms to promote brand awareness and influence consumer behavior.

The market value of the influencer marketing industry is worth $21 billion, with over 60% of consumers saying they rely on influencer recommendations.

5. Consultants

These professionals have remarkable years of experience and are considered experts in their respective fields.

Consultants offer valuable insights and advice in law, finance, and technology, helping clients or businesses solve problems, improve strategic plans, and aid in research.

How Does Self-Employment Impact Taxes?

Self-employed individuals are liable for quarterly tax payments for both self-employment and income tax. The self-employment or SE tax includes the Social Security and Medicare tax.

They’re entitled to a total SE tax rate of 15.3% of 92.35% of their net earnings (gross income minus business expenses). 12.4% of the rate is for Social Security tax, and the remaining portion covers Medicare.

The IRS states that there are exceptions to paying for SE tax. Self-employed individuals with net earnings of less than $400 aren’t liable for paying tax, but they should still file an income tax return.

Tax Deductions for Self-Employed Individuals

Here are some factors that can make self-employed individuals qualified for tax deductions:

• Having existing medical insurance policies
• Renting or having a home office setup  
• Taking continuing education programs
• Leasing or driving a vehicle as part of business operations
• Using the Internet and gadgets to support business operations
• Spending on startup and advertising

The most popular SE tax deduction is using SE tax as a business expense and having half of it deducted from your income tax.

How to Register as Self-Employed

Follow this rough guide for registering for self-employment:

• Register Your Business Name: Your legal name will serve as your business name, but you can also use a different business name known as the DBA (doing business as)
• File for an Employer Identification Number: Go to the IRS website and file for the Employer Identification Number or EIN If you have employees or are paying excise taxes. But if you’re a sole self-employed individual, there’s no need for an EIN, and you can use your social security number.
• Acquire Necessary Permits: Depending on the state or your business type, you’ll either need a permit or license to operate.
• Get an Insurance Coverage: While this is optional, getting insurance for your business is vital in covering unexpected costs like property damage and accidents. You should also open a business bank account to organize your finances.

Frequently Asked Questions

Here are the answers to some related questions people ask about self-employment:

Are There Grants for Self-Employed Individuals?

State agencies and private organizations offer grants to help independent contractors, sole proprietors, and small business owners achieve their financial goals.

One example is the USDA Rural Business Development Grant, a program to support small businesses in rural communities.

You can also access available grants from the Grants.gov database, where you’ll find the corresponding eligibility criteria and requirements.

Do Self-Employed People Get Health Insurance?

HealthCare.gov states that self-employed individuals can get health insurance by accessing the Health Insurance Marketplace and applying.

By enrolling, individuals can see which coverage or program they qualify for, either with premium tax credits on a health plan or low-cost coverage, depending on their net income and other factors (e.g., household size).

Wrapping Up

Self-employment may have several perks, but it’s worth noting that it entails financial and tax responsibilities, too.

As a self-employed individual, you should pay for an SE tax rate of over 15% on top of income tax unless you qualify in their exemption criteria.

To register as self-employed, you can register your business or legal name and file for an Employer Identification Number. For most cases, though, the SSN is used.

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