What Does It Mean To Be Self-Employed?

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Have you ever been asked if you're "self-employed?" Maybe you saw that term in a legal document or description of a federal or state law, and you're not sure what it means and whether it applies to you. To be self-employed, you need to work for yourself and not be an employee or shareholder of another company.

Here's a closer look at what it means to be self-employed.

Key Takeaways

  • If you're self-employed, you work for yourself and are not an employee or shareholder of another company.
  • You can be self-employed and run an LLC or corporation, or be a sole proprietor.
  • You're responsible for paying self-employment taxes when you're self-employed.
  • You may qualify for an additional tax deduction if you're self-employed.
  • You may not be eligible to receive unemployment benefits if you are self-employed.

What Does 'Self-Employed' Mean? 

Self-employed people earn a living by working for themselves, not as employees of someone else or as owners (shareholders) of a corporation. But there are various definitions of "self-employed" that vary slightly.

IRS Definition of Being 'Self-Employed'

The IRS says that you're self-employed if you meet one of these conditions:

  • You carry on a trade or business as a sole proprietor or independent contractor
  • You are a member of a partnership that carries on a trade or business
  • You are in business for yourself, including a part-time business

This definition would also include members (owners) of a limited liability company (LLC) because they are usually taxed as sole proprietors (single-member LLCs) or partners in a partnership (multiple-member LLCs).

The definition of "self-employed" varies depending on the government agency and law. Some definitions are broader, and some are more precise. The definition for the purpose of a particular law or tax regulation governs eligibility for specific programs.

Types of Businesses Owners Who Are Self-Employed

Being self-employed means running your own business, but that business can be set up in a variety of ways. These are the business types that can be owned by someone who is self-employed:

  • Sole proprietorship: Businesses that have only one owner.
  • Partners in a partnership: They share in the ownership of a business and manage the business and share in its profits and losses.
  • Owners (members) of limited liability companies (LLCs): The owner of a one-owner LLC runs the business in the same way as a sole proprietor, but with liability protection. The owners of a multiple-owner LLC run their business in the same way as partners in a partnership.
  • S corporation owners: They are not considered self-employed in the same way that partners in a partnership are. They do not have to pay self-employment tax on their share of the corporation's income. S corporation owners receive a distributive share of the company's income, just as partners in a partnership. If the S corporation's owner also works in the business as an employee, they are paid a salary for that work.

Self-Employment Taxes

Whatever you call yourself, if you are self-employed, an independent contractor, a sole proprietor, a partner in a partnership, or an LLC member, you must pay self-employment taxes (Social Security and Medicare).

Self-employed individuals pay self-employment tax each year if their net earnings from self-employment are $400 or more. The tax is 15.3% (12.4% for Social Security and 2.9% for Medicare) on their annual net income from the business.

Higher-income business owners pay an additional 0.9% on Medicare tax, but the Social Security portion is capped each year. The self-employment tax is calculated and added to the person's tax return as a liability.

Self-employed people are not employees, so no Social Security or Medicare taxes are withheld from their wages. They may need to pay quarterly estimated taxes on self-employment tax and estimated income tax to avoid penalties.

​How Do Self-Employed Individuals Pay Income Taxes?

If you are self-employed, you pay income taxes on 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 pay self-employment taxes based on the net income from that business. 

For partners in partnerships, members in multiple-member LLCs, and S corporation owners, the path to determining your income tax is a little more complicated. You must first prepare and file a tax return for the business and then a Schedule K-1, which shows your share of the income of the company.

Additional Tax Deduction for Self-Employed People

The 2017 Tax Cuts and Jobs Act includes an additional tax deduction you may be able to take as a self-employed person. This Qualified Business Income deduction is a 20% deduction from net business income, in addition to regular business expense deductions. You may get this deduction if you file as a sole proprietor, partner, LLC owner, or S corporation owner, but not as the owner of a corporation. There are some limits and restrictions, so check with your tax professional or use business tax preparation software.

Unemployment for the Self-Employed

The Pandemic Unemployment Assistance (PUA) program, part of the CARES Act, extended unemployment benefits to self-employed individuals through September 2021, but that was a special case because of the pandemic.

Generally speaking, if you are self-employed and do not pay unemployment insurance through your paycheck, you are likely ineligible for unemployment benefits. If you're not sure, check with your state's department of labor or division of unemployment insurance.

Frequently Asked Questions (FAQs)

How do you prove self-employed income?

When asked to show proof of income as a self-employed person, you can use your tax return, bookkeeping records, copies of business bank statements, contracts or work agreements, receipts for invoices or stipends, and more.

What is the tax rate for the self-employed?

If you're self-employed, your tax rate will depend on the amount of income you bring in during the tax year. You're also responsible for paying self-employment taxes, and that tax rate is 15.3%, 12.4% for Social Security and 2.9% for Medicare.

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