Self-Employed

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What does 'Self-Employed' mean

Self-employed is a situation in which an individual works for himself instead of working for an employer that pays a salary or a wage. A self-employed individual earns his income through conducting profitable operations from a trade or business that he operates directly. Although the precise definition of self-employed varies among the Bureau of Labor Statistics, the Internal Revenue Service and private research firms, self-employed people generally include independent contractors, sole proprietors of businesses and those with partnerships in businesses.

BREAKING DOWN 'Self-Employed'

Being self-employed is a different situation than simply being a business owner. A business owner is someone who owns a company but does not work with the day-to-day operation of the company. In contrast, a person who is self-employed owns his own business, of which he is also the primary or sole operator. Furthermore, there are often different taxation-related implications for being self-employed versus being a normal employee or a business owner.

Types of Self-Employment

Independent contractors are people that businesses or individuals hire to do specific jobs. They receive payment only for the jobs that they do, and because they are not counted as employees, when they are working for clients, they do not receive benefits or worker's compensation. Additionally, equal opportunity laws do not apply to them, and their clients do not withhold taxes from their payments for work performed. Examples of independent contractors include doctors, lawyers and accountants who are in business for themselves.

Sole proprietors are people who are the only owners of unincorporated businesses, while partnerships involve two or more self-employed people who form businesses together. Independent contractors, sole proprietors and partnerships often hire a small number of employees to help with their work. As of 2015, about 30% of the workforce in the United States is composed of self-employed people and their employees. The industries with the highest rates of self-employed people include agriculture, construction, and business and professional services.

Taxes for Self-Employed People

Because self-employed people do not have taxes withheld from their income by employers, they are responsible for their own estimated income tax and self-employment tax, which consists of their Social Security and Medicare taxes. As of 2016, self-employed people must pay taxes on annual net profits of over $400. If their income reaches a certain level, they must make quarterly estimated income tax payments. Employees pay only half of their Social Security and Medicare taxes while their employers pay the other half, but self-employed people must pay both the employer and employee portions of these taxes.

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