Self-employment

Self-employment is working for one's self. Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade or business that they operate personally.

To be self-employed is not necessarily the same as being a business owner: Many self-employed people conduct the day-to-day operations of the business, either as managers as line workers or both. A business owner may or may not work in the business, and is not required do so. According the US Bureau of Labor Statistics, only 44% of businesses survive the first 4 years in business.

Policymakers increasingly view self-employment in the form of youth entrepreneurship as a possible solution to the youth unemployment crisis. However, many experts believe only 20% of all people are fit to run their own businesses, so it shouldn't be relied on as an "easy fix".[1]

In some countries, (the US and UK, for example) governments are cracking down on disguised employment, often described as the pretense of a contractual intra-business relationship to hide what is otherwise a simple employer-employee relationship.

Contents

Self-employment in the US

In the United States, any person is considered self-employed for tax purposes if that person is running a business as a sole proprietorship, independent contractor, as a member of a partnership, or as a member of a limited liability company that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay Social Security and Medicare taxes in the form of a SECA (Self-Employment Contributions Act) tax.

US Taxation

The self-employment tax in the United States is typically set at 15.30% which is roughly the equivalent (within 0.6%) of the combined contributions of the employee and employer under the FICA tax. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. The social security portion of the self-employment tax only applies to the first $106,800 of income for the 2009 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax.

Half of the hypothetical self-employment tax is allowed as a deduction against self-employment income so only 92.35% of the self-employment income is taxable at 15.30%, an effective tax rate of about 14.13%. However, this benefit disappears if self-employment income exceeds $105,577, since the entire applicable amount of $97,500 will be taxed at 15.30%.

The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011 [2], for a total of 13.3%. The rate will return to 15.3% for income earned in calendar year 2012.

Self-employed persons sometimes declare more deductions than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses.

Self-employed persons report their business income or loss on Schedule C of IRS Form 1040 and calculate the self-employment tax on Schedule SE of IRS Form 1040. Estimated taxes must be paid quarterly using form 1040-ES if estimated tax liability exceeds $1,000.

401k retirement account

Self-employed workers cannot contribute to a company-run 401k plan of the type with which most people are familiar. However, there are various vehicles available to self-employed individuals to save for retirement. Many set up a Simplified Employee Pension Plan (SEP) IRA, which allows them to contribute up to 25% of their income, up to $49,000 (2009) per year. There is also a vehicle called the Self-Employed 401k or SE 401k for self-employed people. The contribution limits vary slightly depending on how your business is organized but are generally higher than the other types of plans.

Self-employment in the United Kingdom

A self-employed person in the United Kingdom can operate as a sole trader or as an incorporated limited liability company. It is also possible for someone to form a business that is run only part-time or concurrently while holding down a full time job. This form of employment, while popular, does come with several legal responsibilities. When working from home clearance may sometimes be required from the local authority to use part of the home as business premises. Should the business hold records of customers or suppliers in any electronic form it is required to register with the Information Commissioner's Office. Other legal responsibilities include statutory public liability insurance cover, modifying premises to be disabled friendly, and the proper recording and accounting of financial transactions. Free advice on the range of responsibilities is available from government operated Business Link centres.

Many people living with disabilities choose to be self-employed.[3]

UK Taxation

A self-employed person may be subject to more taxes than an average employee. In addition to both the employee and employer National Insurance contributions, there may be VAT, business rates and other taxes payable to central and local governments.

References

  1. ^ Don't bank on self-employment
  2. ^ http://www.irs.gov/businesses/small/article/0,,id=98846,00.html#1
  3. ^ Boylan, A. and Burchardt, T. (2002) Barriers to self-employment for disabled people, Report for the Small Business Service, available at http://www.berr.gov.uk/files/file38357.pdf, last accessed January 2010

External links