> **Definition**
>
> Self-employment simply means working for yourself rather than for an employer.

## What Is Self-Employment?

The Arizona Department of Economic Security defines self-employment as "working for oneself rather than for an employer." The self-employed perform work for pay that comes from clients and customers rather than an employer. They may devote their time to one client or customer or several.

A [self-employed worker](https://www.investopedia.com/terms/s/self-employed-person.asp) can incorporate or establish and work as another legal business entity but it's not required. Also, licensure isn't necessary unless their business or occupation mandates it.

The United States was home to more than 16.3 million self-employed individuals as of January 2025, according to the U.S. Bureau of Labor Statistics.

### Key Takeaways

*   A self-employed worker usually possesses a strong talent, skill, or service that they can market to others.
*   The self-employed are paid by their clients and customers rather than an employer.
*   They must pay both halves of their [Social Security](https://www.investopedia.com/articles/retirement/06/socialsecurity.asp) and Medicare taxes because they don't have an employer to split the obligation.
*   They must also submit estimated tax payments as the year progresses because tax isn't being withheld from their earnings.
*   Their income may not be regular or predictable.

![Self-Employment](https://www.investopedia.com/thmb/tY20lqHO7-CN72_sv0HzXh5D1G8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/self-employed.asp-Final-371c8b583e994ae5965276ef2d992fe6.jpg)

*— Investopedia / Sabrina Jiang*

## Self-Employment Examples in the Real World

A self-employed worker typically possesses talents or skills or offers services to others. Lawyers, particularly those who establish solo law firms, are often self-employed.

Moreover, even if they work at a law firm as partners, they are not employees but rather self-employed. A lawyer would become an employee, however, if a firm hired them as associates rather than partners.

Other self-employed professions include [freelancers](https://www.investopedia.com/terms/f/freelancer.asp), artists, writers, [real estate agents](https://www.investopedia.com/terms/r/realestateagent.asp), repairpersons, and even office and secretarial staff who sell their abilities as needed.

The Internal Revenue Service (IRS) provides guidance about the difference between self-employed workers and employees. In particular, for self-employed workers:

*   A client or customer doesn't establish when or how a self-employed individual performs the work they're paid to do.
*   A self-employed individual typically sets their own payment terms: when they'll be paid and how much they require to do the job.
*   A self-employed individual is typically contracted to perform one task or one job although they can later be engaged to perform another.

## Types of Individuals: Independent Contractors vs. Sole Proprietors

Self-employed individuals are classified as either independent contractors or sole proprietors. They may or may not have employees.

### Independent Contractors

An [independent contractor](https://www.investopedia.com/terms/i/independent-contractor.asp) performs a specific job for a specific client. As the "independent" part of the name implies, they do so on their own terms.

A homeowner might have a structural problem with their house that requires expert repair. They might pay an independent contractor who will care for the problem on a date and at a time determined by the contractor.

The work would be performed for a fee that the contractor determines. The contractor would use their tools and equipment.

They're compensated for a single job. The homeowner won't withhold taxes from their payment or provide employment-associated benefits such as worker's compensation.  

### Sole Proprietors

A [sole proprietor](https://www.investopedia.com/terms/s/soleproprietorship.asp) is the sole owner of an unincorporated business. They can and often do hire employees to assist with daily operations. The owner of a [limited liability company](https://www.investopedia.com/terms/l/llc.asp) can fall into this category, provided that they don't incorporate their business.  

## Benefits of Working for Yourself

Self-employment might be your calling if you're a free spirit. You don't like saluting others or having a boss who controls your time. You want to do things your way, on your terms, and according to your timing.

A self-employed worker doesn't have to take on a job if it doesn't appeal to them. However, the odds are that you truly enjoy the work you perform or you wouldn't be doing it.

Furthermore, unlike a salaried worker, self-employment offers no cap on income potential.

All in all, self-employment offers several attractive benefits to those who fit the mold.

*   You get to set the right balance for your work and personal life.
*   As the boss, you control all decision-making.
*   You steer your career path—and job satisfaction is in your hands.
*   Your own ideas and creativity drive your results and business success.
*   You can develop the skills and expertise that are important to you.
*   The sky's the limit on how much you can earn.

## Downsides of Self Employment

Self-employment may not be right for you if financial security is high on your list of must-haves.

You might depend heavily on a regular paycheck but that income could be non-existent if no one hires you to do a job every week. Having working capital or some [emergency savings](https://www.investopedia.com/terms/e/emergency_fund.asp) set aside can be key for the self-employed.

Sometimes, a client or customer won't pay a contractor after finishing their work. So, it's best to arrange for payment upfront before you perform a job.

In addition, self-employed people have to spend time marketing themselves (or pay someone else to do so) to keep income flowing. And, you must pay for your supplies and equipment as well.

## Financial Considerations

Employers have a great deal of control over your life but they also can take a few burdensome financial tasks and responsibilities off your hands.

For example, many employers offer [options for health insurance coverage](https://www.investopedia.com/the-best-health-insurance-companies-8762191) and contribute to the cost. They may provide paid sick time and vacation time or family leave coverage. Plus, they may offer a retirement plan that helps you save for the future and contribute to it on your behalf.

### Taxes

However, for many self-employed workers, perhaps the greatest financial consideration is that they are solely responsible for keeping the IRS and their state's tax department happy.

Self-employed independent contractors [must make quarterly tax payments](https://www.investopedia.com/fa-one-thing-gig-worker-tax-liability-8621932) throughout the year. An employer isn't available to withhold these taxes from their pay.

The tax filing process is much the same as submitting [Form 1040](https://www.investopedia.com/terms/1/1040.asp) if you were an employee, except that you must attach Schedule C enumerating your business income and available deductions.

And yes, you can [claim certain deductions](https://www.investopedia.com/articles/tax/09/self-employed-tax-deductions.asp) that employees aren't privy to, such as for your home office space and any business-associated miles you put on your vehicle.

Be sure to save your bank statements and carefully track cash payments. Ongoing clients might provide a Form 1099 showing how much they paid you for the year. This form is submitted to the IRS as well.

Your filed tax return can also serve as proof of income if you find that you want to apply for a mortgage or other loan.

Of course, whether you're an independent contractor or a sole proprietor, you can always hire a tax professional to take care of tax issues for you.

### The Self-Employment Tax

There's one last financial wrinkle to self-employment: the [self-employment tax](https://www.investopedia.com/terms/s/selfemploymenttax.asp). Not only are you required to pay estimated income taxes quarterly but you must also pay the full boat on Social Security and Medicare taxes.

Employees get a break here. They pay half of these taxes, and their employers pay the other half.

However, the Internal Revenue Code (IRC) states that a self-employed individual is both an employee and an employer. Therefore, they must pay both halves or 15.3%. This works out to 12.4% of earnings going to Social Security and 2.9% going to [Medicare](https://www.investopedia.com/terms/m/medicare.asp).

But here's some good news: They're entitled to a tax deduction in the amount of the employer's portion when they file their annual tax return.

Only $176,100 of your income is subject to the Social Security tax in 2025, just as is the case for employed taxpayers. This threshold is adjusted annually to keep pace with inflation.

## The Bottom Line

Self-employment has many pros and cons. It might be a perfect fit for you if you don't like answering to anyone, you have financial nerves of steel, and you don't mind rolling up your sleeves to take care of your own marketing, financial books, and tax obligations.

It's on you to snag that next job to keep your finances rolling along but that may not be a hardship if you love what you do and you're good at it.

> **Article Sources**
>
> 1.  Arizona Department of Economic Security. "[Self-Employment Definition](https://dbmefaapolicy.azdes.gov/index.html#page/FAA6/Self-Employment_Definition.html)."
>     
> 2.  U.S. Bureau of Labor Statistics. "[The Employment Situation: Table A-9. Selected Employment Indicators](https://www.bls.gov/news.release/empsit.t09.htm)."
>     
> 3.  Internal Revenue Service. "[Independent Contractor (Self-Employed) or Employee?](https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee)"
>     
> 4.  Internal Revenue Service. "[Sole Proprietorships](https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships)."
>     
> 5.  Internal Revenue Service. "[Self-Employed Individuals Tax Center](https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center)."
>     
> 6.  Internal Revenue Service. "[Schedule C (Form 1040) Profit or Loss From Business 2024](https://www.irs.gov/pub/irs-pdf/f1040sc.pdf)."
>     
> 7.  Internal Revenue Service. "[Am I Required to File a Form 1099 or Other Information Return?](https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return)"
>     
> 8.  Internal Revenue Service. "[Self-Employment Tax (Social Security and Medicare Taxes)](https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes)."
>     
> 9.  U.S. Social Security Administration. "[How Is Social Security Financed?](https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm)"