Content of the material
- What Does Self-Employed Mean?
- IRS Definition
- Benefits for Self-Employed People
- The Downside of Self Employment
- Types of Self-Employment
- 16.3 million
- 2. Choosing and registering a business name: Hint, it’s about licenses
- How Do You Show Proof of Income If You Are Self-Employed?
- Unemployment Tax Benefits During Coronavirus
- Running a business
- Other ways to work for yourself
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.
The IRS says that someone is self-employed if they meet one of these conditions:
- Someone who carries on a trade or business as a sole proprietor or independent contractor,
- A member of a partnership that carries on a trade or business, or
- Someone who is otherwise in business for themselves, including 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).
Benefits for Self-Employed People
For the purpose of the CARES Act (2020) and the Families First Coronavirus Response Act (2020), "self-employed" refers to an individual who "regularly carries on any trade or business," which is a broad definition. (Note that it doesn't say "full-time," so it could include part-time businesses.)
For example, the definition for the Paycheck Protection Program includes a requirement that the worker operate “under a sole proprietorship or as an independent contractor” or as an “eligible self-employed individual.”
The Downside of Self Employment
It would be unfair to say that there are only advantages to self employment. There are some disadvantages to it also.
For instance you need to find clients, and work on your sales abilities so you can generate profit, and pay the rent.
You also need to be a jack of all trades also. From marketing, sales, project management, client management, customer service, payroll, invoicing, and so much more, self employment forces you out of your comfort zone, and into learning new things every day.
Finally you might work alone most of the time, so you may not have a good support system in place, like if you were working within a team of people. This can lead to mental health issues, that you need to nip in the bud as soon as possible. Signing up for mindfulness classes, attended events for people in similar situations, and maintaining a good physical and social calendar can help to ensure your mental health doesn’t suffer when you become self employed.
Types of Self-Employment
Independent contractors are 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 a wide variety of jobs.
Sole proprietors are 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 small number of employees to help them with their work.
16.3 million The number of individuals that are self-employed (incorporated & unincorporated) in the U.S. in March 2022.
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 in 2027. By 2027, it is expected that 50.9% of the workforce will be freelancers.
2. Choosing and registering a business name: Hint, it’s about licenses
Similar to self-employed, registering a business means different things to different people. If you talk to a marketing guru, registering a business might mean trademarking your business name and killer logo. If you talk to a CFO, registering might mean filing your articles of incorporation to make sure ownership stakes are all legally taken care of.
Before jumping into intellectual property and shareholder rights, consider the narrow set of circumstances when a certain type of registration might be required to operate your business, even if you are self-employed.
If you’re a professional business as defined by the SBA, you may need additional licenses or permits. Depending on where you do business, you may need location-specific licenses or permits. Beyond that, your business type and size may require a different type of registration. Let’s take a closer look.
How Do You Show Proof of Income If You Are Self-Employed?
Proof of income may be required in a variety of instances, such as in filing taxes, obtaining a mortgage or other loan, or purchasing health insurance. Ways to show proof of income if you are self-employed include tax returns, Form 1099, bank statements (both personal and of the business account), audited profit and loss statements, and official invoices.
Unemployment Tax Benefits During Coronavirus
The Pandemic Unemployment Assistance (PUA) program, part of the CARES Act extends unemployment benefits to self-employed individuals. If you are self-employed, and you are otherwise able to and available to work, and you have been affected by COVID-19-realted issues, you may be eligible for unemployment benefits. This unemployment assistance program ends on July 31, 2021.
Unemployment benefit programs are run by individual states, with the federal government giving them additional funds for this crisis. To find out more and to apply, contact your state unemployment office. You may get unemployment benefits or a Paycheck Protection Program loan, but you can’t receive both.
The definition of "self-employed" is varies, depending on the government agency and law. Some definitions are broader, and some more precise. The definition for the purpose of a particular law or tax regulation governs eligibility for specific programs.
Running a business
You’re probably self-employed if you:
- run your business for yourself and take responsibility for its success or failure
- have several customers at the same time
- can decide how, where and when you do your work
- can hire other people at your own expense to help you or to do the work for you
- provide the main items of equipment to do your work
- are responsible for finishing any unsatisfactory work in your own time
- charge an agreed fixed price for your work
- sell goods or services to make a profit
Many of these also apply if you own a limited company but you’re not classed as self-employed by HMRC. Instead you’re both an owner and employee of your company.
You can be both employed and self-employed at the same time, for example if you work for an employer during the day and run your own business in the evenings.
You can check whether you’re self-employed:
Other ways to work for yourself
There are other business structures apart from being a sole trader. For example, you can: