The Differences Between Employed vs. Self-Employed

The Differences Between Employed vs. Self-EmployedThe Differences Between Employed vs. Self-EmployedSomeone who is self-employed generally works for themselves as a geschftlicher umgang owner, freelancer, or as anindependent contractorfor aleidher company.Earnings are usually directly from the business or freelancing, instead of salary or commission-based reimbursement. Definition The Internal Revenue Service defines an individual as beingself-employed, for tax purposes, as You carry on a trade or business as a sole proprietor or an independent contractor.You are a member of a partnership that carries on a trade or business.You are otherwise in business for yourself (including a part-time business). Employment Status When youare employedby a company youare consideredanemployee. Employees are on the company payroll, and the employer withholds federal and state taxes, Social Security, and Medicare. Employeesare providedwith unemployment and workers compensation insurance. Emplo yeesmay beoffered benefit packages that include things like paid sick leave, vacation, health insurance, or 401(k) or other retirement plan participation. Self-Employment Taxes If youreself-employed, you are responsible for paying your own taxes to the Internal Revenue Service (IRS) and to your state tax department. Even if you do not owe any income tax, you must complete Form 1040 and Schedule SE to pay self-employment Social Security tax. In addition to income taxes,self-employedworkers must also pay Social Security and Medicare taxes in the form of SECA(Self-Employment Contributions Act). Independent contractors are not entitled to employee benefits, even those mandated by law like unemployment and workers compensation because they are not employees of a company. Unlike a typical employee, independent contractors work less regularly. They work as and when required, and usually bill by the hour or per project, depending on the terms of their contracts. From a tax perspective, employing regular employees costssignificantlymore for employers than independent contractors because theyare requiredto pay Social Security, Medicare, State and unemployment taxesin addition toconsistent, salary or wage-based work. Health Insurance and Other Benefits However, self-employedindividualsand independent contractorsmay beable topurchasehealth insurance and other benefits for you through theAffordable Health Care Act(Obamacare) or throughorganizations like the Chamber of Commerce or others groups thatprovidebenefits for self-employed workers and small business. If you have self-employment income, then you can take adeduction for health insuranceexpenses incurred for yourself, your spouse, and your dependents. Other self-employed tax deductions include home office costs, internet, phone, and fax expenses, meals, business travel and car expenses, interest on business loans, education, IRA contributions, and even some entertainment. Pros and Cons While there are many positives to being self-employed such as choosing your own hours (full orpart-time), shortening or completely avoiding your commute, focusing oncareerobjectivesthat matter most to you, being able to work remotely and tax deductions, one of the downfalls is that benefits usually included in salaried workmust bepaid forout-of-pocket. Furthermore, self-employed workers are responsible for both losses and profits. There are no paid holidays or sick pay, and the earning schedule may be less in theshort term when you are starting out.With no boss or supervisor to manage you, it takes great focus andmotivationto beself-employed. In many circumstances, hours are long and working on your owncan belonely. Health insurancemust becontracted for by theindividual, there are no paid vacations or sick days, and retirementmust beplanned for. Becoming Self Employed For those interested in making the move to becomingself-employed, Small Business Canada Expert Susan Ward has great advice on transi tioning from being an employee to beingself-employed.