What Does it Mean to Be Self Employed?

What Does it Mean to Be Self-employed?
What Does "Self-employed" Mean?. Getty Images

Someone might have asked you if you were "self-employed." Maybe you're not sure what that term means and whether it applies to you. Let's take a look at what it means to be "self-employed.

What does "Self-employed" mean? 

Someone who is self employed is the owner of a business, an individual who earns a living by working for himself/herself and not as an employee of someone else. You are self employed if you have one of the following types of businesses:

Excluding a partnership or LLC taxed as a corporation.

What the IRS Says About Being Self-Employed

The IRS says that a self-employed individual is someone who "owns an unincorporated business."

If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed.

To clarify this definition further, the IRS says:

As a member of a partnership that carries on a trade or business, or as a member of a Limited Liability Company (LLC) that chooses to be treated as a partnership, your distributive share of its income or loss from that trade or business is included in your net earning from self-employment.

An individual who is self employed must pay self-employment taxes (Social Security and Medicare), while an employee of a company must pay half of these taxes and the employer pays the other half.

Self employment is sometimes (wrongly) equated with sole proprietorship, but someone who is a partner or a member of an LLC is also considered self employed.

What's the Opposite of Being Self-employed? 

You could look at a self-employed individual as the opposite of: 

  • Being an employee. A self-employed person is not an employee, and doesn't work for an employer for wages or salary. 
  • Being a corporate shareholder. A shareholder is not self-employed, but is one of the owners of a corporation, receiving dividends based on his or her shares of ownership. Corporate owners who are corporate officers and who work in the corporation are considered employees, not self-employed. 

How Do Self-Employed Individuals Pay Income Taxes?

If you are self-employed, you pay income taxes through your personal tax return (called "pass-through taxes"). If you are a sole proprietor (or single-member LLC) you must complete a Schedule C  and you pay self-employment taxes based on the net income from that business.  

For partners in partnerships and members in multiple-member LLCs, the path to determining your income tax is a little more complicated, since you first must prepare a partnership tax return (for LLCs also) and then a Schedule K-1, which shows your share of the income of the company.

A self employed individual must also pay self-employment taxes on the profits of the business each year.

Losses from self employment may be used to offset income to the individual from other sources.

Are S Corporation Owners Self-employed? 

S corporation owners receive a distributive share of the company's income, just as partners in a partnership. But some of this income may be considered personal income and be subject to self-employment tax, unless this tax has been withheld through FICA taxes. 

Back to Self-Employment Taxes: What You Need to Know

Back to All About Self-Employment and Self-Employment Taxes.

Continue Reading...