‘Self-employed individuals are business owners, but not all business owners are self-employed.’
So, you own a business; while this may technically mean that you are self-employed, the IRS has rules to sort out and classify those who are self-employed and those who are not.
So, what are the types of self-employments?
Before we take a look at the five types of self-employment, understand what self-employment means.
The IRS states that self-employed individuals must do at least one of the following:
- Conduct business or trade as a sole proprietor or an independent contractor
- Be a member of a partnership that conducts a trade or business
- Be otherwise in business for yourself
- Included in the IRS definition of self-employed individuals are members (aka owners) of limited liability companies (LLCs).
With these specifications in mind, let’s dive into the 5 types of self-employment.
5 Types of Self-Employment
According to the IRS, an individual is a freelancer (otherwise known as an independent contractor or contract worker) if the contracting company only controls the results of the work performed. They control how they work and what they will do. Freelancers are their own managers who are responsible for locating and securing their work as well as billing the client.
Independent contractors are not employees of companies (even though they perform work for them). Contractors are their own employers because they work independently and do not receive Form W-2, Wage and Tax Statement. Instead, contractors most commonly receive Form 1099-NEC, Nonemployee Compensation.
The 1099-NEC form reports all payments made to the contractor for the calendar year. Contractors do not create these forms for themselves. Instead, the company the contractor performed work for prepares and sends Form 1099-NEC to the contractor at the end of the calendar year. State laws regarding work policies may exist for contractors.
Gig workers are similar to freelancers in many ways, but there’s a subtle difference.
Gig workers are also not employees and they do not work permanently for the company for which they perform their work. Gig workers also receive Form 1099-NEC at the end of the year to report wages.
But unlike freelancers, gig workers may have less control over when they work due to the nature of what they do. And while freelancers typically work one contracted job at a time, gig workers may work multiple. Another difference is that gig work can be much more short-term than freelance work. Freelancers may spend weeks working on one job while a gig worker may move to the next within a matter of minutes (e.g., photographers). Remember that gig work and freelance work may be used interchangeably.
An individual who owns and operates their business is a sole proprietor if the government recognizes the business and the individual as the same legal entity. In addition to receiving all of the business revenue, they also assume all the risk and any debts. This lack of legal separation puts the business owner’s personal assets at risk.
Individuals automatically are sole proprietors unless they choose and file paperwork to form a different legal structure. Sole proprietors must also file all legal documents using their names (because it’s the legal name of their business). However, you may choose to register a different name for your business using a doing business as (DBA) name. Register the DBA name with your state if you decide to use one. But, file all paperwork for government forms or applications using your actual name, not the DBA.
Sole proprietors file the following forms:
- Schedule C, Profit or Loss From Business
- Form 1040, U.S. Individual Income Tax Return
Sole proprietors must pay self-employment taxes. And, if you’re a sole proprietor, you may need to pay estimated taxes each quarter.
Unlike sole proprietorships, partnerships are businesses owned by two or more people.
There are four types of partnerships:
General partnership: Two or more people own the company and typically share profits and losses equally unless otherwise specified.
Limited partnership: Business owners’ partner with silent investors. The silent investors do not make company decisions, handle daily operations, management functions or the risk of liability. This type of partnership is more structured and can only be created under the state’s limited partnership law.
Limited liability partnership: Members are not personally liable for the business’s debts or other partner’s actions. This type of partnership means that each member is only responsible for their own actions and may be protected from the actions of other members.
LLC partnership: This type of partnership is a limited liability company with multiple members rather than one owner. In this type of partnership, the members typically cannot be sued for the business’s debts or actions. But, members can be held liable for the actions of other members.
The IRS considers partners to be self-employed for tax purposes. Partnerships have pass-through taxation where profits and losses pass through the business to the members. This type of taxation is why partners are considered self-employed.
All partners must file:
- Form 1065, US Return of Partnership Income
- Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc.
Single-Member Limited Liability Companies
An LLC is a business entity that is legally separate from its owner. LLC owners have financial and legal protections similar to corporations, enabling them to open bank accounts and credit cards under the business name without using their personal information.
Because LLCs are separate legal entities, the owner is not held personally liable for any business debts and therefore do not risk their personal assets if the business acquires debt. LLCs experience pass-through taxation, meaning that the income tax liability passes through the business to the business owner. And owners report profits and losses on their personal tax returns, which makes them self-employed to the IRS.
LLC owners are taxed as sole proprietorships and must report the business’s profits and losses on Schedule C, which they attach to their personal income tax return.
In recent years, our country has seen the greatest rise of people making the decision to work for themselves. Our team of business consultants at MCDA CCG know that this movement is only the beginning, and we are here to support our fellow freelancers, gig workers, sole proprietors, partnerships and LLCS all the way.
We pride ourselves on offering state of the art advisory services while enabling our clients to customize our services to fit their needs – all at a cost competitive price you won’t be able to find anywhere else.
Furthermore, with our up-to-date knowledge of the latest changes impacting your business, you will be the first to know of the latest business opportunities to keep you ahead of the game, saving you the countless hours searching for them yourself.
Reach out to one of our team members today by calling our office headquarters in Placentia, Orange County, California for a completely free consultation!
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