Question

are self-employed taxpayers facing a considerable disadvantage when compared to common law or corporate employees? the IRS has created some incentives to grow small businesses, and partnerships. Are self-employed taxpayers still facing considerable hurdles, given the deductibility of certain business expenses?

Answer 1

Self-Employed Person

A self-employed person is an independent contractor or sole proprietor who reports self-employment income. Self-employed persons work for themselves at a variety of trades, professions, and occupations rather than working for an employer. Depending on the jurisdiction, self-employed persons may have special tax filing requirements.

•   Works for Self-Employed Persons

A self-employed person refers to any person who earns their living from any independent pursuit of economic activity as opposed to earning a living working for a company or another individual (an employer). A freelancer or an independent contractor who performs all of their work for a single client may still be a self-employed person.

Self-employed persons may be involved in a variety of occupations, but generally are highly skilled at a particular kind of work. Writers, tradespeople, traders/investors, lawyers, salespeople,and insurance agents may all be self-employed persons.

Self-Employed Persons: United States

A self-employed person in the United States is one who:

• Engages in a trade or a business as a sole proprietor or as an independent contractor.
• Is a member of a partnership involved in a trade or business.
• Is otherwise in business for themselves (including a part-time endeavor).

A self-employed person has to file annual taxes and pay estimated quarterly tax. On top of income tax, they also must generally pay a self-employment tax, which is a Social Security and Medicare tax for the self-employed that was 15.3% as of 2020 (12.9% for Social Security on the first $118,500; 2.9% for Medicare with no ceiling).

To figure out if a self-employment tax is owed, an individual must determine their net income and loss from their activities. For more, see Self-Employment Tax (Social Security and Medicare Taxes) from the Internal Revenue Service (IRS).

Self-employed persons may choose a variety of business structures. The most common are partnership, sole proprietorship, corporation, S corporation or Limited Liability Company (LLC). The self-employed may be eligible to deduct expenses the business use of their home, known as the home office deduction. For more, see the IRS's Self-Employed Individuals Tax Center.

The self-employed in the U.S. are not eligible for retirement savings plans such as a 401(k), but do have alternatives, such as the Self-Employed 401(k) of the Simplified Employee Pension Plan (SEP) IRA.

Challenges of Being Self-Employed

Of course, not all challenges are equal, and you may not encounter them all. But some of the more common challenges of being self-employed include things like:

• No guaranteed income – When you work for someone else, you’re guaranteed a paycheck each month. When you work for yourself, not so much. As such, one of the bigger risks of being self-employed is not knowing how much money you’ll take home.
• Lots of potential costs – More than no guaranteed income, setting up your own business will likely require an initial investment including some overhead costs, and if needed, a cash infusion along the way.
• Multi-tasking duties – You probably started your own business in your area of expertise. But as a business owner you’ll need to take care of all sorts of things. Managing the bookkeeping, hiring staff, scheduling, office supplies, and even cleaning are some of the common challenges of self-employment. In other words, there’s a lot to learn, and do. Even if you don’t do it all yourself (which you probably shouldn’t), you need to learn how to manage it all.
• Marketing and sales – People can only choose to use your services if they know you exist. As an employee, unless you’re in sales or marketing, you generally don’t have to worry . As a business owner, again, it’s up to you.
• Motivation – While some risks faced by small businesses are more concrete, as a small business owner, you’ll face abstract ones too. For example, the challenge of motivation, both for yourself, and any employees you might have. Motivation may be easy when business is booming. But it also applies when things are feeling a little slow.
• Expansion – Are you a contented team of one or do you dream of building an empire? In addition to figuring out how big you want your business to grow, you’ll also need to determine how.

Self-employed taxpayers still facing considerable hurdles, given the deductibility of certain business expenses.As the number of self-employed increases, so, too, does the competition for work. Here's a look at today's challenges for people who work for themselves along with some solutions for overcoming the problems.