The Differences Between Employed vs. Self-Employed

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What's the difference between an employee and someone who is self-employed? Your classification will impact taxes, unemployment compensation, taxes, health insurance coverage, and other benefits.

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.

Learn about the differences between being an employee and being self-employed, including the impact on taxes, unemployment, health insurance, and other benefits.

Key Takeaways

  • Self-employed workers are in business for themselves as sole proprietors or independent contractors.
  • Employees work for an organization, and the employer provides mandatory benefits, may offer additional optional benefits, and withholds taxes.
  • Independent contractors are typically not eligible for employer benefits, unemployment, or workers' compensation.

Self-Employed Definition

The Internal Revenue Service defines an individual as being self-employed, for tax purposes, if:

  • 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).

Employee Definition

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 packages that include paid sick leave, vacation, health insurance, and 401(k) or other retirement plan participation.

Self-Employment Taxes

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 SECA (Self-Employment Contributions Act).


From a tax perspective, employing regular employees costs significantly more for employers than independent contractors because they are required to pay Social Security, Medicare, state, and unemployment taxes, in addition to a consistent salary or hourly wage-based work.

Unemployment Benefits

Independent contractors are typically not entitled to employee benefits, even those mandated by law like unemployment and worker's compensation, because they are not employees of a company.

Unlike a typical employee, independent contractors work less regularly. They work as and when required, and usually bill by the hour or per project, depending on the terms of their contracts.

Health Insurance and Other Benefits

Self-employed individuals and independent contractors may be able to purchase health insurance and other benefits through the individual Health Insurance Marketplace or through organizations like the Chamber of Commerce or other groups that provide benefits for self-employed workers and small businesses.

If you have self-employment income, you can take a deduction for health insurance expenses incurred for yourself, your spouse, and your dependents. Other self-employed tax deductions include home office costs, internet, phone, and fax expenses, meals, business travel and car expenses, interest on business loans, education, IRA contributions, and even some entertainment.

Pros and Cons

While there are many positives to being self-employed, such as choosing your own hours (full or part-time), shortening or completely avoiding your commute, focusing on career objectives that matter most to you, 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.

Furthermore, self-employed workers are responsible for both losses and profits. There are no paid holidays or sick pay, and the earning schedule may be less in the short term when you are starting out. With no boss or supervisor to manage you, it takes great focus and motivation to be self-employed. In many circumstances, hours are long, and working on your own can be lonely.

Health insurance must be contracted for by the individual, there are no paid vacations or sick days, and retirement must be planned for.

Frequently Asked Questions (FAQs)

Can an employer set my work schedule if I'm an independent contractor?

Independent contractors are considered to be self-employed, typically set their own hours, and are paid a flat rate or a per-job rate.

Can I get unemployment if I'm self-employed and out of work?

Self-employed workers and independent contractors who lose their income are typically not eligible for unemployment benefits. If you're not sure about your eligibility, check with your state unemployment department for guidelines.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Self-Employed Individuals Tax Center."

  2. IRS. "Employee or Independent Contractor? Know the Rules."

  3. NOLO. "Pros and Cons of Hiring Independent Contractors."

  4. "Health coverage if You're Self-Employed."

  5. IRS. "Deducting Business Expenses."

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