Self-Employment

What is self-employment?

Self-employment means working for yourself rather than for an employer. Self-employed people earn pay from clients or customers and typically control how, when, and where they perform their work. They may operate as sole proprietors, independent contractors, freelancers, business owners, or other legal business entities.

Over 16 million people in the U.S. are self-employed, covering a wide range of occupations from solo lawyers and real estate agents to writers, artists, repairpersons, and gig workers.

How it works

• Self-employed workers set their own terms for payment, scheduling, and the methods used to complete work.
• They may work for a single client or several clients.
• They can choose to incorporate or operate under another legal business form, but incorporation is not required unless mandated by their profession.

Common examples

• Solo law practitioners or partners in a law firm (these are typically self-employed unless hired as associates).
• Freelancers (writers, designers, developers).
• Independent contractors (construction, repair, consulting).
• Real estate agents and small-business owners.

Types: independent contractor vs. sole proprietor

• Independent contractor: Hired to perform a specific job for a client, uses their own tools, sets their schedule, and is paid for the completed job. Clients generally do not withhold taxes or provide employee benefits.
• Sole proprietor: Owner of an unincorporated business. A sole proprietor can hire employees and may operate under a trade name. An owner of a single-member LLC may be treated as a sole proprietor for tax purposes unless the business elects another classification.

Benefits of self-employment

• Control over work schedule, clients, and business decisions.
• Greater flexibility to balance work and personal life.
• Freedom to pursue projects you enjoy and to develop specialized skills.
• Unlimited income potential—earnings are not capped by an employer’s salary structure.
• Direct rewards for creativity and initiative.

Downsides of self-employment

• Income can be irregular and unpredictable.
• No employer-provided benefits such as health insurance, paid time off, or retirement contributions unless you provide them yourself.
• You must cover business expenses (supplies, equipment, marketing).
• Clients may delay or fail to pay; getting paid upfront or using contracts helps mitigate this risk.
• You must handle or outsource bookkeeping, taxes, invoicing, and business development.

Financial and tax considerations

• Self-employed individuals are responsible for making estimated tax payments periodically because taxes are not typically withheld from their earnings.
• Tax filings generally use Form 1040 with a Schedule C (Profit or Loss from Business) to report business income and deductions.
• Common deductible expenses include home office costs (when qualifying rules are met), business-related vehicle mileage, supplies, advertising, and other ordinary and necessary business expenses.
• Keep careful records: bank statements, invoices, receipts, and Forms 1099 from clients help document income and expenses and support loan or mortgage applications.

Self-employment tax

• Self-employed people pay both the employee and employer portions of Social Security and Medicare taxes—commonly referred to as self-employment tax.
• The combined rate is roughly 15.3% (12.4% for Social Security and 2.9% for Medicare) on net earnings, subject to the applicable Social Security wage base limit that is adjusted annually.
• You may deduct the employer-equivalent portion of this tax when calculating income tax on your annual return.
• Because of these tax obligations, many self-employed people work with a tax professional to ensure accurate estimated payments and deductions.

Bottom line

Self-employment offers freedom, flexibility, and the potential for higher rewards, but it also brings added responsibilities: irregular income, business costs, marketing, recordkeeping, and full tax obligations. It can be an excellent fit if you value independence, are comfortable managing finances and taxes, and are prepared to actively seek and manage clients or customers.