The terms self-employed and small business owner are often used interchangeably, but they’re not the same thing. In fact, there are some major differences between being a small business owner and simply being self-employed. To understand these differences better, it helps to know what each one of these labels entails—and how you can benefit from one over another.
An individual is self-employed if they are the owner of a business, earn income from freelancing or are paid by contract. Self-employment is a classification of employment, meaning it’s not tied to a single employer or company. You may be self-employed in one profession and employed by another at the same time.
Self-employed people aren’t covered by most employee benefits such as family leave, unemployment insurance and worker’s compensation. This means that if you lose your job through no fault of your own (such as getting laid off), you won’t qualify for unemployment benefits unless your state has elected to provide them for those who work part-time or on contract jobs—and even then it’s up to each state whether they’ll extend this benefit to people who work on their own terms instead of someone else’s.
Self-employed people must pay their own federal taxes. There is no employer withholding these taxes out of their paycheck like there would be if they were employed full time with one employer that withheld income tax from each paycheck before adding other deductions (such as self employed insurance premiums). Some states also have different requirements when it comes to paying sales tax while being self-employed vs working at an organization where the company handles all sales tax reporting requirements on behalf of its employees
The self-employed and small business owners are not the same. A small business owner is just that—a sole proprietor, a partnership or a corporation. A self-employed person is an individual who operates a non-incorporated business on their own. This can mean doing freelance work as a web designer from home or full-time employment as an accountant in your own office space. The main difference between these two entities? For one thing, small business owners are responsible for all of the taxes and insurance required for running their company. Self-employed individuals simply pay income tax on what they earn from their work.
Can You Be a Small Business Owner and Self-Employed?
You can be a small business owner and self-employed at the same time, but it’s important to understand that self-employment is a separate entity from your small business.
You can also be self-employed without being a small business owner, which means you have an individual income (or more than one) coming in that you’re using to support yourself.
For example, let’s say you have multiple streams of revenue coming in: You work as a freelance writer for several publications and write books on the side under your own publishing company; you run a blog where brands pay you to post sponsored content; and every now and then, someone hires you for consulting work on SEO strategy or building an online presence. If all three of these things meet the IRS’ definition of “self-employment,” then they qualify as such—and when combined with some other forms of income (like rent), they would make up your total personal earnings for tax purposes.
Tax Advantages for the Small Business Owner
A small business owner can deduct a variety of expenses that a self-employed person cannot. The most common deductions for small business owners are ones for travel and entertainment, home office, health insurance premiums, retirement savings contributions, education expenses and charitable contributions.
The tax rules for small businesses differ from the rules that apply to self-employed individuals. Small businesses may be eligible for an assortment of tax breaks in addition to those available to other companies.
Tax Advantages for the Self-Employed
If you’re looking to get into self-employment, things might seem a bit more complicated than they first appeared. While it gets some perks that small business owners don’t enjoy, the self-employed are still subject to several limitations.
One of the most significant differences between the two types of business owners is in tax deductions allowed under Section 162 and Section 212. The Small Business Health Care Tax Credit allows small businesses to deduct insurance premiums paid for their employees on top of other standard employee benefits like health savings accounts (HSAs) and retirement plans like 401(k)s.
The Self-Employed Health Insurance Deduction allows small business owners who are also self-employed income earners to deduct expenses related to their own health insurance coverage through an HSA or flexible spending account (FSA). The same goes for equipment purchases—a deduction that may not be available if you’re working as an employee instead of running your own show as a full-time gig.
If you’re thinking about starting a business, it’s important to understand the difference between being self-employed and owning a small business. While both can be successful ventures, they have different characteristics and require different levels of commitment from their owners, including factors like incorporation services cost, which can impact the financial and legal setup of a business.
Joyce Kimber is an entrepreneurial writer. She always finds new ways to improve her work performance and productivity. Connect with her on Twitter via @joyce_kimber91.
This is such an interesting read! It’s so difficult to find somewhere that explains so clearly what the differences are between a business owner and self employed! Thanks for sharing!