Someone who is self-employed generally works for themselves as a business owner, freelancer, or as an independent contractor for another company. Earnings are usually directly from the business or freelancing, instead of salary or commission-based reimbursement.
While there are many positives to being self-employed such as choosing your own hours, being able to work remotely and tax deductions, one of the downfalls is that benefits usually included in salaried work must be paid for out of pocket. Health insurance must be contracted for by the individual, there are no paid vacations or sick days, and retirement must be planned for.
When You're Self Employed
In either case, if you're self employed you are responsible for paying your own taxes to the Internal Revenue Service (IRS) and to your state tax department. Even if you do not owe any income tax, you must complete Form 1040 and Schedule SE to pay self-employment Social Security tax.
In addition to income taxes, self employed workers must also pay Social Security and Medicare taxes in the form of a SECA (Self-Employment Contributions Act). Independent contractors are not entitled to employee benefits, even those mandated by law like unemployment and worker's compensation, because they are not employees of a company.
However, you may be able to purchase health insurance and other benefits for yourself through the Affordable Heath Care Act (Obamacare) or through organizations like the Chamber of Commerce or others groups that provide benefits for self-employed workers and small business.
If you have self-employment income, then you can take a deduction for health insurance expenses incurred for yourself, your spouse, and your dependents.
The Internal Revenue Service defines an individual as being self employed, for tax purposes, as:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business).
Being Employed vs. Self Employed
When you are employed by a company you are considered an employee. Employees are on the company payroll, and the employer withholds federal and state taxes, Social Security, and Medicare. Employees are provided with unemployment and workers' compensation insurance. Employees may be offered benefits like paid sick leave, vacation, health insurance, or 401(k) or other retirement plan participation.
Becoming Self Employed
For those interested in making the move to becoming self employed, About.com's Guide to Small Business: Canada Susan Ward has great advice on transitioning from being an employee to being self employed.
Employment Articles and Advice
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