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LEGAL DICTIONARY

Self-Employed

What Does Self-Employed Mean?

When you are self-employed (also called self-employment), you work for yourself rather than for a specific employer who pays your wage or salary. Someone who is self-employed often has a variety of clients for whom they contract their work.

Self-employed people represent a wide range of occupations, including the following skilled professions:

As well as many more examples. Independent contractors often use independent contractor agreements or service agreements to document the arrangements made with their clients and customers.

These types of agreements give both parties proof of an agreement to provide specific goods or services, when and where they are to be provided, and the payment that is expected for the completion of the project.

How Do Self-Employed People Pay Taxes?

Employers typically withhold taxes from the wages or salaries of their employees. However, as an independent contractor, a self-employed individual must pay their taxes on their own. This tax includes a self-employment tax, portions of which go to Social Security and Medicare.

According to the IRS, a self-employed individual is someone who meets one of the following conditions:

  • A person who maintains a trade or business as a sole proprietor or independent contractor
  • A member of a partnership that maintains a trade or a business
  • An individual who is in business for themselves, including part-time companies and trades.

Can Self-Employed Individuals Be Part of a Corporation?

By definition, self-employment can include members (also called owners) of limited liability companies (LLCs). They typically are taxed as sole proprietors or as partners in a partnership.

However, if you own and operate a corporation, the IRS considers you as an owner-employee of the corporation, not as someone who is self-employed.

Some self-employed individuals choose to set up S Corporations because of their tax advantages. With an S Corp, business income passes directly to the shareholders. This scenario means that as an independent contractor, you pay yourself a salary and are taxed on that income only, not the entire income of the S Corp.

Independent contractors must exercise discipline when it comes to paying taxes since they do not receive W-2s and must make sure they have enough money to pay what they owe in estimated tax or when tax time rolls around.

What Are the Pros And Cons of Being Self-Employed?

The layoffs and shutdowns of the pandemic caused many people to consider self-employment for the first time. As of May 2022, there were more than 10 million self-employed workers in the U.S., according to the U.S. Census Bureau.

Over the last year, the number of self-employed Americans has been rising, hitting a record high of 10.3 million in July 2021, coinciding with an overall economic growth of 5.7 percent.

The primary advantages of self-employment are flexibility and control that being one’s own boss can provide. However, a downside is the lack of guaranteed work and the regular paycheck that comes with it.

Independent contractors also must exercise discipline when it comes to paying taxes since they do not receive W-2s and must make sure they have enough money to pay what they owe in estimated tax or when tax time rolls around.

Helpful Resources:

Investopedia - Self-Employment Definition

The Balance Small Business - What Does It Mean to Be Self-Employed?

Internal Revenue Service - Independent Contractor (Self-Employed) or Employee?

Royal Legal Solutions - Why Do Independent Contractors Love the S Corps?

What Does Self-Employed Mean?

When you are self-employed (also called self-employment), you work for yourself rather than for a specific employer who pays your wage or salary. Someone who is self-employed often has a variety of clients for whom they contract their work.

Self-employed people represent a wide range of occupations, including the following skilled professions:

As well as many more examples. Independent contractors often use independent contractor agreements or service agreements to document the arrangements made with their clients and customers.

These types of agreements give both parties proof of an agreement to provide specific goods or services, when and where they are to be provided, and the payment that is expected for the completion of the project.

How Do Self-Employed People Pay Taxes?

Employers typically withhold taxes from the wages or salaries of their employees. However, as an independent contractor, a self-employed individual must pay their taxes on their own. This tax includes a self-employment tax, portions of which go to Social Security and Medicare.

According to the IRS, a self-employed individual is someone who meets one of the following conditions:

  • A person who maintains a trade or business as a sole proprietor or independent contractor
  • A member of a partnership that maintains a trade or a business
  • An individual who is in business for themselves, including part-time companies and trades.

Can Self-Employed Individuals Be Part of a Corporation?

By definition, self-employment can include members (also called owners) of limited liability companies (LLCs). They typically are taxed as sole proprietors or as partners in a partnership.

However, if you own and operate a corporation, the IRS considers you as an owner-employee of the corporation, not as someone who is self-employed.

Some self-employed individuals choose to set up S Corporations because of their tax advantages. With an S Corp, business income passes directly to the shareholders. This scenario means that as an independent contractor, you pay yourself a salary and are taxed on that income only, not the entire income of the S Corp.

Independent contractors must exercise discipline when it comes to paying taxes since they do not receive W-2s and must make sure they have enough money to pay what they owe in estimated tax or when tax time rolls around.

What Are the Pros And Cons of Being Self-Employed?

The layoffs and shutdowns of the pandemic caused many people to consider self-employment for the first time. As of May 2022, there were more than 10 million self-employed workers in the U.S., according to the U.S. Census Bureau.

Over the last year, the number of self-employed Americans has been rising, hitting a record high of 10.3 million in July 2021, coinciding with an overall economic growth of 5.7 percent.

The primary advantages of self-employment are flexibility and control that being one’s own boss can provide. However, a downside is the lack of guaranteed work and the regular paycheck that comes with it.

Independent contractors also must exercise discipline when it comes to paying taxes since they do not receive W-2s and must make sure they have enough money to pay what they owe in estimated tax or when tax time rolls around.

Helpful Resources:

Investopedia - Self-Employment Definition

The Balance Small Business - What Does It Mean to Be Self-Employed?

Internal Revenue Service - Independent Contractor (Self-Employed) or Employee?

Royal Legal Solutions - Why Do Independent Contractors Love the S Corps?