Self-employment
Encyclopedia
Self-employment is working for one's self.
Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade
or business
that they operate personally.
To be self-employed is not necessarily the same as being a business owner: Many self-employed people conduct the day-to-day operations of the business, either as managers as line workers or both. A business owner may or may work in the business, and is not required do so. According the US Bureau of Labor Statistics, only 44% of businesses survive the first 4 years in business.
Policymakers increasingly view self-employment in the form of youth entrepreneurship as a possible solution to the youth unemployment crisis. However, many experts believe only 20% of all people are fit to run their own businesses, so it shouldn't be relied on as an "easy fix".
In some countries, (the US and UK, for example) governments are cracking down on disguised employment, often described as the pretense of a contractual intra-business relationship to hide what is otherwise a simple employer-employee relationship.
, any person is considered self-employed for tax purposes if that person is running a business as a sole proprietorship
, independent contractor
, as a member of a partnership
, or as a member of a limited liability company
that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay Social Security
and Medicare
taxes in the form of a SECA (Self-Employment Contributions Act) tax.
. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. The social security portion of the self-employment tax only applies to the first $106,800 of income for the 2009 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax.
Half of the hypothetical self-employment tax is allowed as a deduction against self-employment income so only 92.35% of the self-employment income is taxable at 15.30%, an effective tax rate of about 14.13%. However, this benefit disappears if self-employment income exceeds $105,577, since the entire applicable amount of $97,500 will be taxed at 15.30%.
The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011 , for a total of 13.3%. The rate will return to 15.3% for income earned in calendar year 2012.
Self-employed persons sometimes declare more deductions
than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses.
Self-employed persons report their business income or loss on Schedule C of IRS Form 1040 and calculate the self-employment tax on Schedule SE of IRS Form 1040. Estimated taxes must be paid quarterly using form 1040-ES if estimated tax liability exceeds $1,000.
can operate as a sole trader or as an incorporated limited liability company. It is also possible for someone to form a business that is run only part-time or concurrently while holding down a full time job. This form of employment, while popular, does come with several legal responsibilities. When working from home clearance may sometimes be required from the local authority to use part of the home as business premises. Should the business hold records of customers or suppliers in any electronic form it is required to register with the Information Commissioner's Office. Other legal responsibilities include statutory public liability insurance cover, modifying premises to be disabled friendly, and the proper recording and accounting of financial transactions. Free advice on the range of responsibilities is available from government
operated Business Link
centres.
Many people living with disabilities
choose to be self-employed.
contributions, there may be VAT
, business rates and other taxes payable to central and local governments.
Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
or business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
that they operate personally.
To be self-employed is not necessarily the same as being a business owner: Many self-employed people conduct the day-to-day operations of the business, either as managers as line workers or both. A business owner may or may work in the business, and is not required do so. According the US Bureau of Labor Statistics, only 44% of businesses survive the first 4 years in business.
Policymakers increasingly view self-employment in the form of youth entrepreneurship as a possible solution to the youth unemployment crisis. However, many experts believe only 20% of all people are fit to run their own businesses, so it shouldn't be relied on as an "easy fix".
In some countries, (the US and UK, for example) governments are cracking down on disguised employment, often described as the pretense of a contractual intra-business relationship to hide what is otherwise a simple employer-employee relationship.
Self-employment in the US
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, any person is considered self-employed for tax purposes if that person is running a business as a sole proprietorship
Sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits and has unlimited responsibility for...
, independent contractor
Independent contractor
An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when...
, as a member of a partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
, or as a member of a limited liability company
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
and Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
taxes in the form of a SECA (Self-Employment Contributions Act) tax.
US Taxation
The self-employment tax in the United States is typically set at 15.30% which is roughly the equivalent (within 0.6%) of the combined contributions of the employee and employer under the FICA taxFederal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...
. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. The social security portion of the self-employment tax only applies to the first $106,800 of income for the 2009 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax.
Half of the hypothetical self-employment tax is allowed as a deduction against self-employment income so only 92.35% of the self-employment income is taxable at 15.30%, an effective tax rate of about 14.13%. However, this benefit disappears if self-employment income exceeds $105,577, since the entire applicable amount of $97,500 will be taxed at 15.30%.
The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011 , for a total of 13.3%. The rate will return to 15.3% for income earned in calendar year 2012.
Self-employed persons sometimes declare more deductions
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses.
Self-employed persons report their business income or loss on Schedule C of IRS Form 1040 and calculate the self-employment tax on Schedule SE of IRS Form 1040. Estimated taxes must be paid quarterly using form 1040-ES if estimated tax liability exceeds $1,000.
401k retirement account
Self-employed workers cannot contribute to a company-run 401k plan of the type with which most people are familiar. However, there are various vehicles available to self-employed individuals to save for retirement. Many set up a Simplified Employee Pension Plan (SEP) IRA, which allows them to contribute up to 25% of their income, up to $49,000 (2009) per year. There is also a vehicle called the Self-Employed 401k or SE 401k for self-employed people. The contribution limits vary slightly depending on how your business is organized but are generally higher than the other types of plans.Self-employment in the United Kingdom
A self-employed person in the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
can operate as a sole trader or as an incorporated limited liability company. It is also possible for someone to form a business that is run only part-time or concurrently while holding down a full time job. This form of employment, while popular, does come with several legal responsibilities. When working from home clearance may sometimes be required from the local authority to use part of the home as business premises. Should the business hold records of customers or suppliers in any electronic form it is required to register with the Information Commissioner's Office. Other legal responsibilities include statutory public liability insurance cover, modifying premises to be disabled friendly, and the proper recording and accounting of financial transactions. Free advice on the range of responsibilities is available from government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
operated Business Link
Business Link
Business Link is a government-funded business advice and guidance service in England. It consists of an online portal managed by HMRC, local/regional advisors and a national helpline.-History:...
centres.
Many people living with disabilities
Self-employment for people with disabilities (UK)
In the UK, self-employment is a popular option for disabled people. Of those in paid work, 18 per cent of disabled men and 8 per cent of disabled women are self-employed as their main job, compared to only 14 per cent and 6 per cent of non-disabled men and women respectively. Unfortunately, many...
choose to be self-employed.
UK Taxation
A self-employed person may be subject to more taxes than an average employee. In addition to both the employee and employer National InsuranceNational Insurance
National Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits...
contributions, there may be VAT
Vat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...
, business rates and other taxes payable to central and local governments.