Table of Contents
- What Is Self-Employment?
- Key Takeaways
- Self-Employment Examples in the Real World
- Types of Individuals: Independent Contractors vs. Sole Proprietors
- Independent Contractors
- Sole Proprietors
- Benefits of Working for Yourself
- Downsides of Self-Employment
- Financial Considerations
- The Self-Employment Tax
- The Bottom Line
What Is Self-Employment?
Let me start by telling you what self-employment really means. According to the Arizona Department of Economic Security, it's simply working for yourself instead of an employer. You get paid by clients or customers for the work you do, whether that's for one person or several at a time.
You can incorporate your business or set it up as another legal entity if you want, but it's not required. And unless your specific occupation demands it, you don't need any special licensure.
As of January 2025, the U.S. Bureau of Labor Statistics reports over 16.3 million self-employed people in the United States.
Key Takeaways
If you're self-employed, you typically have a strong skill, talent, or service that you market directly to others. Your income comes from clients, not an employer, and you handle both parts of Social Security and Medicare taxes since there's no boss to share that burden.
You also need to make estimated tax payments throughout the year because nothing is withheld from your earnings. Keep in mind, your income might not be steady or predictable.
Self-Employment Examples in the Real World
Think about lawyers who run their own solo firms—they're self-employed. Even partners in a law firm count as self-employed, not employees, but if they're hired as associates, that changes things.
Other examples include freelancers, artists, writers, real estate agents, repairpersons, and even office staff who offer their services on a contract basis.
The IRS has clear rules to distinguish this: clients don't dictate your schedule or methods, you set your own payment terms, and you're usually hired for specific tasks, though repeat work can happen.
Types of Individuals: Independent Contractors vs. Sole Proprietors
Self-employed people fall into categories like independent contractors or sole proprietors, and they might have employees or not.
Independent Contractors
As an independent contractor, you take on a specific job for a client on your own terms. For instance, if a homeowner needs a repair, you decide the when, how, and fee, using your own tools. You're paid for that one job, with no taxes withheld or benefits provided.
Sole Proprietors
A sole proprietor owns an unincorporated business outright and can hire employees to help run it. This includes owners of limited liability companies that aren't incorporated.
Benefits of Working for Yourself
If you're someone who hates having a boss and wants to control your own time, self-employment could suit you. You can turn down jobs that don't interest you, and since you probably love what you do, that's a plus.
Unlike a salary job, there's no limit to how much you can earn. You set your work-life balance, make all the decisions, steer your career, drive success with your ideas, build the skills you value, and potentially earn as much as you want.
Downsides of Self-Employment
But if you need financial stability, this might not be for you. Income can dry up if no one hires you, so having savings or working capital is crucial.
Clients might not pay after the work is done, so get payment upfront. You also have to market yourself or hire someone to do it, and cover all your own supplies and equipment.
Financial Considerations
Employers handle things like health insurance contributions, paid time off, and retirement plans, but as self-employed, that's all on you.
Taxes are a big one—you file like anyone else but add Schedule C for business income and deductions. You can deduct home office space or mileage, so track everything carefully. Ongoing clients might send you a Form 1099, and your tax return can prove income for loans. Hiring a tax pro is an option.
The Self-Employment Tax
You pay quarterly estimated taxes, plus the full 15.3% self-employment tax—12.4% for Social Security and 2.9% for Medicare—since you're both employee and employer.
The good news is you deduct half of that on your return. Only up to $176,100 of income is subject to Social Security tax in 2025, and it adjusts yearly.
The Bottom Line
Self-employment has its ups and downs. It's ideal if you thrive on independence, have financial resilience, and can manage marketing, books, and taxes yourself. You secure your own jobs, but if you love your work and excel at it, that might not be an issue.
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