Summary: In self-employment an individual works for themselves instead of being employed by a company.
Self-Employment
Self-employment is working for yourself instead of any employer. When you’re self-employed, you are your boss, manage your work, and are responsible for the success or failure of your business.
Being self-employed is an important legal distinction because of labor and tax law compliance. If you are self-employed, no one else is responsible for your treatment as a worker – you manage yourself by making your hours and working as much or as little as you see fit. You also don’t have an employer who deducts taxes and contributions to social programs from your income. Instead, you’re responsible for paying your taxes and any necessary contributions to social schemes.
How can you tell if you’re self-employed? Different countries use different criteria to decide if you’re an employee or are self-employed. In the US, an economic reality test measures the degree to which you conform to criteria that make you an employee or an independent contractor. In the UK, these criteria include things like:
- Selling products regularly or being paid to provide a service.
- Managing your own business.
- Making your own hours.
- Negotiating your own payment for products or services.
- Selling products or providing services to more than just a single client.
- Owning the equipment you use to do your work.
It’s also important to note that it’s possible to be an employee with one job and also be self-employed. You may have an employer for your regular job and then be self-employed doing other work on evenings and weekends, for example.
Is self-employment the same as sole proprietorship?
Self-employment can come in many forms according to the laws of different countries. In the US, for example, a self-employed individual is anyone who owns (at least in part) and operates their own business and is not employed by another employer. It’s possible to be self-employed as a sole proprietor, independent contractor, a partner in a partnership, or the whole or part owner of a limited liability company (LLC).
A sole proprietorship, also known as a sole tradership, is one form of self-employment. In this case, the individual is the single owner of a business that sells products or services. In a sole proprietorship, the business is normally not seen as a legally separate entity from the owner themself. It may be registered as a different trade name or simply in the name of the owner. However, it generally won’t receive its own tax number and, therefore, won’t pay corporate taxes. All profits from the sole proprietorship pass through to the owner, who then pays income tax on them instead. In the US, owners of sole proprietorships also pay self-employment tax of 15.3%, which goes to Social Security and Medicare. The individual owner is also liable for all debts and damages incurred by the sole proprietorship, and this liability is unlimited.
What are the benefits of self-employment over regular employment?
Many people choose to be self-employed because of the advantages this way of working can have over traditional employment. These benefits include:
- Enjoyment
As a self-employed worker, you can choose to do work that you enjoy that might not be offered by any employers. You can also forge new areas of work, providing new products or services that no one else does. - Flexibility
As your own boss, you make your own hours and decide how much or how little to work. This is particularly beneficial for people with complex commitments or disabilities that make it difficult to conform to a normal work schedule. - Freedom
Self-employed people can do business as they see fit rather than having to perform tasks as their bosses direct them. They may also work a lot more than is legally allowed by an employer who must legally limit their overtime.
What are the potential downsides?
While working for yourself may seem like a dream come true to many people, there are also disadvantages to self-employment, such as:
- Inconsistency of income
While a traditional employer pays you a standard salary on a regular basis, you may not be able to expect the same when you’re self-employed. Work, and therefore income, may not come in consistently and that can make financial management difficult. - Lack of benefits
Employers normally provide benefits like insurance, sick leave, paid vacation, and more. However, when you’re self-employed, no one else gives you benefits. - Liability
When you’re self-employed as a sole proprietor, partner, or independent contractor, you normally have unlimited liability for debts and damages incurred through your business. - Taxation
While an employer will normally deduct taxes from your pay, you need to handle your own tax payments when you’re self-employed. These can be difficult to calculate without the help of a dedicated human resources (HR) department, which traditional employers normally offer.
How do umbrella companies help with self-employment?
If you want to manage your own work and your own hours yet limit the downsides of self-employment, an umbrella company may be an appropriate solution. An umbrella company essentially acts as the official employer for a collection of clients who are otherwise sole proprietors or independent contractors. It will usually take on the HR functions of deducting taxes and social contributions on its client’s behalf, as well as providing insurance and pension schemes in many jurisdictions. Crucially, an umbrella company ensures you have consistent employment, which is useful for securing bank loans.
As a self-employed person, you can pay administrative fees to an umbrella company to provide you with legal employment and HR management. At the same time, you don’t lose the autonomy you have in your work or the responsibilities of finding your own clients and income.
Self-employment support services
Self-employment comes in many forms, including partnerships, independent contracting, sole proprietorships, and LLCs. Umbrella companies produce hybrid situations to employ self-employed workers. Even though you want to be self-employed, you don’t have to go it alone. Organizations like Remote People can provide self-employed people with company incorporation and umbrella company services to give support while helping them keep their all-important autonomy.
Authors:
Marcel is an experienced journalist and Public Relations expert with an honours degree in Journalism and bylines with a range of major brands.
