Self-employment: What it means, types, benefits, and examples

From self-employed to freelancer to business owner, there are a lot of terms that all seem to represent the very same thing: people who work for themselves and earn income on their own terms.

But, even though people often use these and other words, like 1099 employees, interchangeably, do all of these labels mean the same thing? Or is it more like comparing apples to oranges?

This guide explains what it means to be self-employed, how self-employment works, the main types of self-employed workers, the benefits and disadvantages, your tax responsibilities, and how to keep your finances organized.

What does self-employed mean?

A self-employed person runs their own business, working for themselves instead of as an employee of a company or organization.

Who is considered self-employed?

Several types of workers are considered self-employed. The IRS defines a person as self-employed if they are:

• An individual in business for yourself, such as a sole proprietor
• The member of a single-member LLC that's taxed as a sole proprietorship
• A partner in a partnership
• A member of a multi-member LLC that's treated as a partnership for tax purposes

How does self-employment work?

Self-employment is when individuals work for themselves, often as a freelancer or independent contractor. They have full control over their work and set their hours and rates, generally working directly with clients or customers, unlike employees.

Beyond the day-to-day work, self-employment also means running the business side yourself. You handle your own administration (e.g., billing, scheduling, and recordkeeping), and you arrange your own benefits and insurance, such as health coverage and retirement savings. There's more to running your own business than the work itself, and that responsibility is part of what gives you so much control.

The main difference in self-employed vs. employed work comes down to control and responsibility. Employees follow an employer's schedule and have taxes withheld from each paycheck, while self-employed people set their own terms and manage their own taxes.

What are the different types of self-employment?

Self-employment is a broad category, and several different labels fall under it. Although many people use the term "self-employed" interchangeably with terms like "freelancer," "independent contractor," and "sole proprietor," there are subtle differences. Here are the most common types of self-employed individuals:

These categories can overlap. For example, someone could be a freelancer who operates as a sole proprietor and considers themselves a solopreneur. The labels describe different aspects of how someone works or runs their business.

Freelancer

Freelancers are self-employed individuals who work on a project-by-project basis for multiple clients, offering their skills and services. When people compare self-employed vs. freelance work, the key point is that every freelancer is self-employed, but not everyone who is self-employed works as a freelancer.

Freelancing is typical for industries like:

• Writing
• Design
• Programming
• Marketing
• Consulting

Freelancers typically work independently and can choose which projects they take on. They also set their own rates, determine their project timelines, and work from any location. For more on this path, see our guide to working as a freelancer.

Independent contractor

An independent contractor is similar to a freelancer, typically specializing in a particular field and offering their services to multiple clients. In the independent contractor vs. self-employed comparison, an independent contractor is one type of self-employed worker. The term describes how they're hired, under a contract, rather than reflecting a separate tax status.

Like a freelancer, an independent contractor executes tasks or projects for a client or organization, using their expertise and skills in exchange for a fee. Independent contractors control their work and handle client billing and invoicing themselves.

Sole proprietor

A sole proprietor is an individual who solely owns and operates a business. Unlike freelancers and independent contractors, sole proprietors may offer a range of products or services. For example, they can operate retail stores, online stores, or other types of businesses that sell products.

Another distinction is the level of legal liability. With a sole proprietorship, the owner assumes full liability for any legal issues or business debts. This means that the owner's assets are at risk if the business faces any legal actions or financial troubles.

While independent contractors and freelancers are self-employed, sole proprietors take on more responsibility as they operate an entire business entity independently.

Solopreneur

A solopreneur owns and runs a one-person business. The term blends "solo" and "entrepreneur" and usually describes someone focused on building and growing a business rather than just taking on individual projects.

Solopreneurship can overlap with freelancing and other kinds of self-employment. The difference is often mindset and structure: a freelancer may move from project to project, while a solopreneur tends to treat their work as an ongoing business. Many solopreneurs handle everything themselves, from the actual work to marketing, invoicing, and bookkeeping.

What are the benefits of being self-employed?

Self-employment offers several advantages over traditional employment. The most common benefits include:

• Flexibility and autonomy: Being self-employed allows you to have more control over your schedules and the ability to work on projects you're passionate about.
• Independence and work variety: Self-employment allows for personal and professional growth as individuals have full control over business decisions. It also allows individuals to learn new skills and work on a variety of projects.
• Tax benefits: Self-employed individuals can take various self-employed tax deductions to reduce their taxable income.

What are the disadvantages of being self-employed?

Self-employment also comes with real trade-offs. The main disadvantages include:

• Greater responsibility: Self-employed individuals must manage all aspects of the business, including administration, marketing, finance, and client management. This can be overwhelming and time-consuming.
• Potential financial instability: Self-employment often comes with fluctuations in income, with times of limited or no income.
• Lack of benefits and security: Unlike traditional employment, self-employed individuals do not have access to benefits such as health insurance, retirement plans, or paid time off.

Unlike employees, self-employed individuals do not have the security of a steady paycheck and may face additional costs associated with running a business, such as taxes and insurance.

What is self-employment tax?

Self-employment tax is a tax that covers Social Security and Medicare for people who work for themselves. When you're an employee, you and your employer split these contributions. When you're self-employed, you cover both portions yourself.

The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). Only your net earnings from self-employment are subject to it.

Self-employment tax is separate from income tax. You pay income tax on your earnings, and you pay self-employment tax to fund Social Security and Medicare.

You have to file an income tax return if your net self-employment income is $400 or more. Because taxes aren't withheld from your pay, you may also need to pay quarterly estimated taxes throughout the year to cover both your income tax and self-employment tax.

Examples of self-employed jobs

Being self-employed can take on many forms. Here are some examples of self-employed jobs or roles:

• A freelance writer, for instance, works independently and takes on various writing assignments for clients. They are self-employed, which allows them more flexibility in choosing projects and setting their own rates.
• A photographer who operates their own studio also falls under the self-employed category. They manage their own business, handle client bookings, and offer their services directly to customers.
• A food truck owner is another example of being self-employed. They are responsible for managing all aspects of their establishment, such as creating menus and handling finances.
• A woodworker considers themself self-employed, as they build kitchen tables in their woodshop and then sell them for a profit online.
• A rideshare or delivery driver who operates as an independent contractor, where applicable, and chooses when to make themselves available for work.
• An online seller who runs a shop on a marketplace or their own website.

How to manage your finances when you're self-employed

Staying organized with your money makes self-employment far less stressful. Here are five basics to help you stay on track:

1. Track income and expenses. Record what comes in and what goes out so you always know where your business stands.
2. Separate business and personal finances. Open a dedicated business account to keep your records clean and simplify tax time.
3. Set aside money for taxes. Because no one withholds taxes for you, put a portion of each payment aside to cover what you'll owe.
4. Invoice clients and monitor payments. Send invoices promptly and keep an eye on which ones are still outstanding.
5. Keep organized records for deductions and reporting. Save receipts and documentation so you can claim deductions and report accurately.

Handling all of this by hand works at first, but the right tools can save you hours, which is where accounting software comes in.

Manage self-employment with QuickBooks

When you're ready to put these habits into practice, QuickBooks offers two options built with self-employed people in mind.

QuickBooks Solopreneur is designed for one-person businesses that want tools built around managing self-employed finances. It can help organize and categorize linked business and personal transactions, tracks mileage and receipts, lets you send invoices, and helps organize income and expenses for Schedule C reporting and tax preparation.

QuickBooks Free is a no-cost starting point for self-employed people with simpler needs. This free accounting software lets you connect one bank account, track income and expenses, send up to two invoices per month, and run core reports like profit and loss, all without a credit card.

Not sure which fits? If you're just getting organized, QuickBooks Free is a simple place to begin. If you want more built-in tools for your one-person business, take a closer look at QuickBooks Solopreneur.

Explore both options and choose the one that best fits where your business is today.