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Self Employed / Self-Employment

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Definition:

Someone who is self employed is the owner of a business, an individual who earns a living by working for himself/herself and not as an employee of someone else. You are self employed if you have one of the following types of businesses:

Excluding a partnership or LLC taxed as a corporation.

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, the IRS says:

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.

How Do Self-Employed Individuals Pay Income Taxes?

If you are self-employed, you pay income taxes through your personal tax return (called "pass-through taxes"). If you are a sole proprietor (or single-member LLC) you must complete a Schedule C , 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.

A self employed individual must also pay self-employment taxes on the profits of the business each year. Losses from self employment may be used to offset income to the individual from other sources.

Back to Self-Employment Taxes: What You Need to Know

Back toAll About Self-Employment and Self-Employment Taxes.

Examples:
An individual who is self employed must pay self-employment taxes (Social Security and Medicare), while an employee of a company must pay half of these taxes and the employer pays the other half. Self employment is sometimes confused with sole proprietorship, but someone who is a partner or a member of an LLC is also considered self employed.

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