Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a
tax return
A tax return is the completion of documentation that calculates an entity or individual's income earned and the amount of taxes to be paid to the government or government organizations or, potentially, back to the taxpayer.
Taxation is one of ...
needs to be filed. In the real world, the critical issue for the tax authorities is not whether a person is engaged in a business activity (called "trading" even when referring to the provision of a service) but whether the activity is profitable and therefore potentially taxable. In other words, the activity of trading is likely to be ignored if no profit is present, so occasional and hobby- or enthusiast-based economic activity is generally ignored by the tax authorities. Self-employed people are usually classified as a
sole proprietor
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...
(or sole trader),
independent contractor
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
, or as a member of a
partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
.
Self-employed people generally find their own work rather than being provided with work by an employer and instead earn income from a profession, a trade, or a business that they operate. In some countries, such as the United States and the United Kingdom, the authorities are placing more emphasis on clarifying whether an individual is self-employed or engaged in disguised employment, in other words pretending to be in a contractual intra-business relationship to hide what is in fact an employer-employee relationship.
Difference between self-employment, entrepreneurship, and startup
Self-employment provides work primarily for the founder of the business. The term
entrepreneurship
Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values th ...
refers to all new businesses, including self-employment and businesses that never intend to grow big or become registered, but the term
startup refers to new businesses that intend to provide work and income for more than the founders and intend to have employees and grow large.
In summary:
* self-employment: an organization created with the primary intention to provide work to the founder.
* entrepreneurship: any new organization.
* startup: a temporary new organization created with the intention to get bigger or at least have employees.
United States
Although the common perception is that self-employment is concentrated in a few
service sector
The tertiary sector of the economy, generally known as the service sector, is the third of the three economic sectors in the three-sector model (also known as the economic cycle). The others are the primary sector (raw materials) and the second ...
industries, like salespeople and
insurance agents
An insurance broker is an intermediary who sells, solicits, or negotiates insurance on behalf of a client for compensation. An insurance broker is distinct from an insurance agent in that a broker typically acts on behalf of a client by negotia ...
, research by the
Small Business Administration
The United States Small Business Administration (SBA) is an independent agency of the United States government that provides support to entrepreneurs and small businesses. The mission of the Small Business Administration is "to maintain and stren ...
has shown that self-employment occurs across a wide segment of the U.S. economy. Furthermore, industries that are not commonly associated as a natural fit for self-employment, such as manufacturing, have in fact been shown to have a large proportion of self-employed individuals and home-based businesses.
In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, any person is considered self-employed for tax purposes if that person is running a business as a
sole proprietorship
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...
,
independent contractor
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
, as a member of a
partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
, or as a member of a
limited liability company
A limited liability company (LLC for short) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a ...
that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
and
Medicare taxes in the form of a SECA (Self-Employment Contributions Act) tax.
In 2016, the median income for individuals self-employed at their own incorporated businesses was $50,347. For individuals self-employed at their own unincorporated firms, this figure was $23,060.
Immigrant and ethnic minorities
Self-employment is relatively common among new immigrants and ethnic minorities in the United States. In the United States, immigrants tend to have higher rates of self-employment than native-born Americans regardless of race or ethnicity. But, self-employment in the United States is unevenly distributed across racial/ethnic lines. Immigrants and their children who self-identify as White have the highest probability of self-employment in lucrative industries such as professional services and finance. In contrast, racial and ethnic minorities are less likely than native-born Whites to be self-employed, with the exception of Asian immigrants who have a high rates of self-employment in low prestige industries such as retail trade and personal services. Much like the regular labor market, self-employment in the United States is stratified across racial lines.
In general, self-employment is more common among immigrants than their second-generation children born in the United States. However, the second-generation children of Asian immigrants may continue to seek self-employment in a variety of industries and occupations.
Taxation
The self-employment tax in the United States is typically set at 15.30%, which is roughly the equivalent of the combined contributions of the employee and employer under the
FICA tax
The Federal Insurance Contributions Act (FICA ) is a United States federal payroll (or employment) contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for reti ...
. 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 $132,900 of income for the 2019 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax. In fact, there is an additional Medicare tax rate of 0.9% when a self-employed individual earns above $200,000 (single).
Generally, only 92.35% of the self-employment income is taxable at the above rates. Additionally, half of the self-employment tax, i.e., the employer-equivalent portion, is allowed as a deduction against income.
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%. This rate will continue for income earned in calendar year 2012, due to the
Temporary Payroll Tax Cut Continuation Act of 2011.
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.
401(k) retirement account
Self-employed workers cannot contribute to a company-run
401(k) 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 $54,000 (2017) per year. There is also a vehicle called the
Self-Employed 401k (or SE 401(k)) for self-employed people. The contribution limits vary slightly depending on how the business is organized.
A defined-benefit plan is a third option that has high contribution limits and acts like a traditional pension plan. Sole proprietors can also opt for a SIMPLE IRA, which allows them to contribute to employee retirement plans as well as their own retirement plan.
Effects on income growth
Research has shown that levels of self-employment in the United States are increasing, and that under certain circumstances this can have positive effects on per capita income and job creation. According to a 2017 study by MBO Partners, the self-employed workforce generates $1.2 trillion in revenue for the U.S. economy, which is equal to about 6% of national GDP. A 2011 study from the
Federal Reserve Bank of Atlanta
The Federal Reserve Bank of Atlanta, (informally referred to as the Atlanta Fed and the Bank), is the sixth district of the 12 Federal Reserve Banks of the United States and is headquartered in midtown Atlanta, Georgia.
The Atlanta Fed cover ...
and
Pennsylvania State University
The Pennsylvania State University (Penn State or PSU) is a Public university, public Commonwealth System of Higher Education, state-related Land-grant university, land-grant research university with campuses and facilities throughout Pennsylvan ...
looked at U.S. self-employment levels from 1970 to 2000. According to data from the U.S.
Bureau of Economic Analysis
The Bureau of Economic Analysis (BEA) of the United States Department of Commerce is a U.S. government agency that provides official economy of the United States, macroeconomic and industry statistics, most notably reports about the gross domestic ...
, the absolute number of people registered as non-farm proprietors (NFPs) or self-employed in metropolitan counties grew by 244% between 1969 and 2006, and by 93% in non-metropolitan counties. In relative terms, the share of self-employed within the labor force grew from 14% in 1969 to 21% in 2006 in metropolitan counties, and from 11% to 19% in non-metropolitan counties.
[ JournalistsResource.org, retrieved June 19, 2012]
In non-metropolitan counties, the study found that increased levels of self-employment were associated with strong increases in per capita income and job creation and significant reductions in family
poverty
Poverty is the state of having few material possessions or little income. Poverty can have diverse social, economic, and political causes and effects. When evaluating poverty in ...
levels. In 1969, the average income of non-farm proprietors was $6,758 compared to $6,507 earned by salaried employees; by 2006 the difference in earnings widened to $12,041 in favor of salaried employees. The study notes that the gap could be due to underreporting of income by the self-employed. Alternatively, low-productivity workers could be losing their jobs and are forced to be self-employed.
Further, some research shows that higher local unemployment rates lead workers to self-select into self-employment, as does past unemployment experience.
European Union
The
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...
defines a self-employed person as someone: "pursuing a gainful activity for their own account, under the conditions laid down by national law". In the exercise of such an activity, the personal element is of special importance and such exercise always involves a large measure of independence in the accomplishment of the professional activities. This definition comes from Directive 2010/41/EU on the application of the principle of equal treatment between men and women engaged in an activity in a self-employed capacity. This is in contrast to an employee, who is subordinate to and dependent on an employer.
In addition, Article 53 of the Treaty on the Functioning of the European Union (TFEU) provides for the free movement of those taking up and pursuing activities as self-employed people. It stipulates: "In order to make it easier for persons to take up and pursue activities as self-employed persons, the Council shall… issue Directives for the mutual recognition of diplomas, certificates and other evidence of formal qualifications".
The self-employment form of work does not group homogenous workers. As indicated by the European Commission in 2010, there are "different understandings and definitions of the term self-employment across the countries, with a number of different subcategories defined: for instance, according to the legal status of the enterprise, whether the business has employees or not (employers versus own-account workers) and/or the sector in which the business operates. Some countries also make the distinction between self-employed status and the status of 'dependent self-employed' (e.g. Spain, Italy), where the self-employed person works for only one client. Others distinguish self-employment which is carried out in addition to paid employment (e.g. Belgium)".
The European Parliament Resolution on Social Protection for All has stated that: "the absence of a clear national definition of self-employment increases the risk of false self-employment" and the European Parliament Resolution on the Renewed Social Agenda invites Member States to take initiatives that would "lead to a clear distinction between employers, genuine self-employed and small entrepreneurs on the one hand and employees on the other".
Self-employment is mostly regulated at national level only. Each authority and individual body applies its own legal and regulatory framework provisions, which may vary depending on their remit or policy area (tax law, social security, business law, employment market, insurance). The provisions related to self-employment vary therefore widely between the countries. As indicated by the
European Foundation for the Improvement of Living and Working Conditions (Eurofound) in 2014, the diversity of the self-employed has attracted diverse forms of regulation, mainly decided at national level: "EU employment law addresses the self-employed mainly in narrowly specific areas such as free movement and equal treatment".
As recommended by the European Forum of Independent Professionals (EFIP), the EU, employers', employees' and self-employment representatives should adopt a Europe-wide joint recognition of genuine self-employment and a common definition that includes a shared terminology for the various sectors.
United Kingdom
![Self-employment in the UK, 2008 to 2014](https://upload.wikimedia.org/wikipedia/commons/2/28/Self-employment_in_the_UK%2C_2008_to_2014.png)
According to a 2016 study by the McKinsey Global Institute, there are 14 million independent workers in the United Kingdom. A self-employed person in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
can operate as a
sole trader
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...
or as a partner in a partnership (including a
limited liability partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not ...
or "LLP") but not through an incorporated limited (or
unlimited) 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
remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
ing, clearance may sometimes be required from the local authority to use part of the home as business premises. Should the self-employed person hold records of customers or suppliers in any electronic form they will be required to register with the
Information Commissioner's Office
The Information Commissioner's Office (ICO) is a non-departmental public body which reports directly to the Parliament of the United Kingdom and is sponsored by the Department for Digital, Culture, Media and Sport (DCMS). It is the independe ...
. 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
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
operated
Business Link
Business Link was a government-funded business advice and guidance service established in England in 1992. It consisted of an online portal managed by HM Revenue and Customs (HMRC) and a national telephone helpline.
The service's network of ...
centres.
Many
people living with disabilities choose to be self-employed.
[Boylan, A. and Burchardt, T. (2002) Barriers to self-employment for disabled people, Report for the Small Business Service, available at http://www.berr.gov.uk/files/file38357.pdf , last accessed January 2010]
See also
*
Convention on the Rights of Persons with Disabilities, Article 27
*
Freelancer
''Freelance'' (sometimes spelled ''free-lance'' or ''free lance''), ''freelancer'', or ''freelance worker'', are terms commonly used for a person who is self-employed and not necessarily committed to a particular employer long-term. Freelance w ...
*
Self-employment for people with disabilities (UK)
*
Sole proprietorship
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...
*
Remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
*
Workers' self-management
Workers' self-management, also referred to as labor management and organizational self-management, is a form of organizational management based on self-directed work processes on the part of an organization's workforce. Self-management is a def ...
References
External links
The_Internal_Revenue_Service_[U.S./nowiki>.html" ;"title=".S.">The Internal Revenue Service
[U.S.
/nowiki>">.S.">The Internal Revenue Service [U.S.
/nowiki>br>The Taxation of Capital and Labor through the Self-employment Tax
Congressional Budget Office
*https://www.gov.uk/working-for-yourself
{{Authority control
Employment classifications
Employment