What Is Self-Employment?
Self-employment is earning income without being employed and paid by someone else. Self-employed individuals often engage in various occupations but typically excel in particular skills. Examples include writers, tradespeople, freelancers, traders/investors, lawyers, salespeople, and insurance agents. Self-employed individuals are not bound to a traditional employer, granting them flexibility but also bringing specific tax obligations.
Key Takeaways
- Self-employment permits individuals to work independently rather than for a specific employer.
- Self-employed persons must usually pay estimated taxes quarterly.
- While offering flexibility and autonomy, self-employment comes with higher employment risk and potentially variable income.
Embrace the Essence of Self-Employment
The definition of self-employment varies across different agencies and institutions, yet it fundamentally means earning a living from independent economic activity rather than working for a company. Whether as an independent contractor, sole proprietor, or partner, self-employed people make the income directly from their endeavors and expertise. It’s crucial to note the distinction between self-employment and business ownership: while a self-employed person might be the business itself, a business owner may not be actively involved in the business operations.
Navigating Special Considerations
Self-employed individuals must handle their annual tax filings and pay estimated quarterly taxes. They are responsible for the self-employment tax, which is 15.3% of earnings. This includes 12.4% toward Social Security (for the first $168,600 starting in 2024) and 2.9% for Medicare taxes. Income below an annual net profit of $400 is exempt from taxation.
Reaping the Benefits and Facing the Drawbacks of Self-Employment
Advantages
- You’re your own boss.
- Choose projects you’re passionate about.
- Set your own hours and enjoy flexible scheduling.
- Enjoy specialized work that aligns with your interests.
Disadvantages
- No paid time off or vacation pay—time off results in income loss.
- Responsible for your own health insurance and retirement benefits.
- Constantly need to find new work to stay profitable.
- Must comply with tax laws, filing requirements, and state and local regulations.
Pros
- Autonomy in decision-making
- Selection of projects
- Flexible working hours
- Pursuit of personal interests
Cons
- Absence of paid leave
- Lack of employer-provided benefits
- Variable work availability
- Tax responsibilities are solely yours
Discovering Different Types of Self-Employment
Independent Contractors
Independent contractors provide specific services and receive payment per task or project. These roles do not offer benefits, worker’s compensation, or tax withholdings. Common examples include doctors, journalists, actors, and accountants working independently.
Sole Proprietors and Partnerships
A sole proprietor is an individual running an unincorporated business, possibly with the assistance of employees. Partners share ownership and responsibility for a business, frequently employing several workers.
Statistics from the U.S. as of March 2024 show around 10.11 million self-employed individuals. Freelancing within the gig economy is expected to rise significantly, with projections suggesting 86.5 million freelancers by 2027, making up 50.9% of the workforce.
Identifying Main Types of Self-Employment
The primary types include independent contractors (working on specific jobs), sole proprietorships (individual-run businesses, sometimes with employees), and partnerships (a business structure involving two or more self-employed people working together).
How to Prove Your Income as a Self-Employed Individual
Proof of income is crucial for tax filings, acquiring loans or mortgages, and obtaining health insurance. Self-employed persons can use tax returns, Form 1099, bank statements, audited profit and loss statements, and official invoices as evidence of income.
Embracing the Rewards of Being Self-Employed
The self-employed enjoy many benefits including being in charge of their career path, creating personalized work environments, choosing collaborators, reveling in the challenges of starting/sustaining a business, and having flexible schedules.
Final Thoughts
Self-employment offers a balance of independence and responsibilities. While one can enjoy the freedom of setting personal work schedules and projects, the role comes with significant tax and administrative duties. Prospective self-employed individuals must weigh both the upsides and downsides before diving into this work style.
Related Terms: Gig Economy, Freelancers, Sole Proprietor, Self-Employment Tax.
References
- Internal Revenue Service. “Self-Employed Individuals Tax Center”.
- Internal Revenue Service. “Self-Employed Individuals Tax Center”.
- Social Security Administration. “How Is Social Security Financed?”
- Internal Revenue Service. “Self-Employment Tax (Social Security and Medicare Taxes)”.
- U.S. Equal Employment Opportunity Commission. “Coverage: Deciding Who Is Covered”.
- Internal Revenue Service. “Sole Proprietorships”.
- Internal Revenue Service. “Tax Information for Partnerships”.
- U.S. Bureau of Labor Statistics. “The Employment Situation—March 2024”. Page 20.
- Statista. “Number of Freelancers in the United States From 2017 to 2028”.
