A week or so ago, I discussed the difference between sole proprietors and independent contractors. Today, I'm adding another similar term: the "self-employed individual." What's the difference between a "self-employed" individual, a sole proprietor, and an independent contractor?
IRS Definition of a Self-Employed Individual
The IRS says that a self-employed individual is someone who "owns an unincorporated business."
If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed.
To clarify this definition further, IRS discusses partners in partnerships and members in LLCs:
As a member of a partnership that carries on a trade or business, or as a member of a Limited Liability Company (LLC) that chooses to be treated as a partnership, your distributive share of its income or loss from that trade or business is included in your net earning from self-employment.
A self-employed individual can be a sole proprietor, a partner, or a member. And, of course, you can be an independent contractor at the same time.
How Do Self-Employed Individuals Pay Income Taxes?
What the IRS is trying to show you is that if you're self-employed, you pay income taxes through your personal tax return. If you are a sole proprietor (or single-member LLC) you must complete a Schedule C - Income from Business, and including the net income from that schedule along with other income on your personal tax return.
For partners in partnerships and members in multiple-member LLCs, the path to determining your income tax is a little more complicated, since you first must prepare a partnership tax return (for LLCs also) and then a Schedule K-1, which shows your share of the income of the company.
Self-Employed? Sole Proprietor? Independent Contractor? Whatever you call yourself, you must pay self-employment taxes (Social Security and Medicare) on your business income. Check out this article on Self-Employment Taxes to find out more.
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