What Is a Self-Employed Person?
A self-employed person is an independent contractor or sole proprietor who reports self-employment income. Self-employed persons work for themselves at a variety of trades, professions, and occupations rather than working for an employer. Depending on the jurisdiction, self-employed persons may have special tax filing requirements.
How It Works for Self-Employed Persons
A self-employed person refers to any person who earns their living from any independent pursuit of economic activity as opposed to earning a living working for a company or another individual (an employer). A freelancer or an independent contractor who performs all of their work for a single client may still be a self-employed person.
Self-employed persons may be involved in a variety of occupations, but generally are highly skilled at a particular kind of work. Writers, tradespeople, traders/investors, lawyers, salespeople,and insurance agents may all be self-employed persons.
Self-Employed Persons: United States
A self-employed person in the United States is one who:
- Engages in a trade or a business as a sole proprietor or as an independent contractor.
- Is a member of a partnership involved in a trade or business.
- Is otherwise in business for themselves (including a part-time endeavor).
A self-employed person has to file annual taxes and pay estimated quarterly tax. On top of income tax, they also must generally pay a self-employment tax, which is a Social Security and Medicare tax for the self-employed that was 15.3% as of 2020 (12.9% for Social Security on the first $118,500; 2.9% for Medicare with no ceiling).
To figure out if a self-employment tax is owed, an individual must determine their net income and loss from their activities. For more, see Self-Employment Tax (Social Security and Medicare Taxes) from the Internal Revenue Service (IRS).
Self-employed persons may choose a variety of business structures. The most common are partnership, sole proprietorship, corporation, S corporation or Limited Liability Company (LLC). The self-employed may be eligible to deduct expenses the business use of their home, known as the home office deduction. For more, see the IRS's Self-Employed Individuals Tax Center.
The self-employed in the U.S. are not eligible for retirement savings plans such as a 401(k), but do have alternatives, such as the Self-Employed 401(k) of the Simplified Employee Pension Plan (SEP) IRA.
Self-Employed Persons: Europe
Individuals who work for themselves in the United Kingdom are classified as a sole trader, which means they are a self-employed person. If a person runs their own business and are responsible for its success and failure, have several customers simultaneously, decide when and how to work, and have a number of other characteristics, then they are likely self-employed. For more, see Working for Yourself.
In the E.U., a self-employed person is defined as those "who work in their own business, professional practice or farm for the purpose of earning a profit, and who employ no other persons."