Self-Employment: Definition, Types, and Benefits (2024)

What Is Self-Employment?

Self-employment is earning income without being employed and paid by someone else. Self-employed persons may be involved in a variety of occupations but generally are highly skilled at a particular kind of work. Writers, tradespeople, freelancers, traders/investors, lawyers, salespeople, and insurance agents all may be self-employed. Self-employment isn't like being a traditional worker because self-employed individuals aren't tied to an employer. Being self-employed gives people flexibility but comes with certain tax implications.

Understanding Self-Employment

The precise definition of self-employment depends on who you ask, as it varies among different agencies, including the U.S. Bureau of Labor Statistics (BLS), the Internal Revenue Service (IRS), and private research firms. However, the overarching definition of the term is the state of earning a living from any independent pursuit of economic activity instead of earning a living working for a company or entity.

A self-employed person is anyone who performs work for pay, independent contractors, sole proprietors of businesses, and individuals engaged in partnerships. A freelancer or an independent contractor who performs all of their work for a single client may still be a self-employed person.

Being self-employed is often confused with owning a business, but the two concepts aren't necessarily the same. A self-employed person is usually the business itself, whereas a business owner may own the company but not be involved in operating or managing it.

Special Considerations

A self-employed person must file annual taxes and payan estimated quarterly tax. They are also required to pay what is called the self-employment tax in addition to income tax. This tax equals 15.3% of their earnings. Of this tax,12.4% goes to Social Securityon the first $168,600 in 2024, and 2.9% goes to Medicare tax.

Those who make less than an annual net profit of $400 are exempt from paying taxes on that income.

Advantages and Disadvantages of Self-Employment

There are benefits and drawbacks of working as a self-employed individual. We've highlighted some of the key pros and cons below.

Advantages

While self-employment generally requires much more work and attention, many benefits are attractive:

• You are the boss
• You have the luxury of deciding what projects you work on
• You work the hours you want, which gives you the freedom to take time off and work whenever you want
• You can specialize in work you enjoy rather than working for pay doing something you may not like

Disadvantages

One of the most significant disadvantages of self-employment is that there is no entity withholding and paying your estimated taxes or withholding—you're required to pay estimated federal taxes quarterly. Some other disadvantages are:

• There are no paid days off or paid vacation time, so a day off is a day without pay
• You are responsible for your own health insurance and retirement benefits
• You must ensure you remain profitable and busy, finding work for yourself
• You must ensure you abide by the tax laws, filing requirements, and any applicable fees in your state and county

Types of Self-Employment

Independent contractorsare businesses or individuals hired to do specific jobs. They receive payment only for the jobs that they do. Because they are not considered employees,they do not receive benefits or workers’ compensation, their clients do not withhold taxes from their payments for work performed, and equal opportunity laws do not apply to them.

Examples of independent contractors include doctors, journalists, freelance workers, lawyers, actors, and accountants who are in business for themselves. It is worth noting that independent contractors are not just limited to specialized fields and can include various jobs.

Sole proprietorsare the only owners of unincorporated businesses, while partnerships involve two or more self-employed people who form a business together. Independent contractors, sole proprietors, and partnerships often hire a few employees to help them with their work.

It is estimated that freelancers, particularly in what is known as the gig economy, will continue to grow. There were approximately 67.6 million freelancers in 2021, which is expected to grow to 86.5 million by 2027. It is expected that 50.9% of the workforce will be freelancers by 2027.

The Bottom Line

A self-employed person isn't tied to a specific employer. They more or less decide when they'll work and when they won't. As such, a self-employed person is their own boss, which comes with certain tax liabilities. This includes paying the employee and employer portions of Social Security and Medicare taxes as well as periodic income tax payments. They must also foot the bill for supplies, equipment, and office space. Although it may sound tempting, it's important to consider the benefits and disadvantages carefully if you're considering going out independently as a self-employed person.