Self employment

Self-employment is working for one's self rather than for another person or company. A person who is self-employed is one who works for himself or herself instead of an employer, but drawing income from a trade or business that they operate personally. A self-employed person can be organized as a sole proprietorship or can work as an independent contractor or freelancer.

Self-employment and taxes

In the U.S., if you are in business for yourself with no employees, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would be subject to the following taxes or tax policy:

Income tax

Income taxes must be paid on the self-employed person's net earnings or adjusted gross income (gross revenue minus deductions) In addition to the the IRS Tax Form 1040, a self employed person must file a schedule C or Schedule C-EZ form for each source of income.

Self-employment taxes

Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

Estimated taxes

This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you can be penalized for underpayment at the end of the tax year.

Criteria for being considered self-employed

Because different tax and regulatory guidelines apply to employees and independent contractors, it is important to understand the difference between the two. While the following list is provided by the IRS, you should consult your personal tax or legal advisor for advice related to your personal classification:

• 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.

• Trade or business: A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

• Part-time business: You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.

• Sole proprietor: You are a sole proprietor if you own an unincorporated business by yourself, in most cases. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

• Independent contractor: People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to SE tax.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to SE tax. However, your earnings as an employee may be subject to SE tax under other rules discussed in this section.

See also

• Accounting Hub
• How to determine if a worker is an independent contractor or an employee
• Sole proprietor
• Independent contractor

External links

• IRS.gov Self-employed Individuals Tax Center