Product Code Database
Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return needs to be filed. In the real world, the critical issue for tax authorities is not whether a person is engaged in business activity (called trading even when referring to the provision of a service) but whether the activity is profitable and therefore potentially taxable. In other words, the trading is likely to be ignored if there is no profit, so occasional and hobby- or enthusiast-based economic activity is generally ignored by tax authorities. Self-employed people are usually classified as a sole proprietor (or sole trader), independent contractor, or as a member of a partnership.
Self-employed people generally find their own work rather than being provided with work by an employer and instead earn income from a profession, a trade, or a business that they operate. In some countries, such as the United States and the United Kingdom, the authorities are placing more emphasis on clarifying whether an individual is self-employed or engaged in disguised employment, in other words pretending to be in a contractual intra-business relationship to hide what is in fact an employer-employee relationship.
| +2021 self-employment rate by countryOECD ! Country !! Rate (%) |
| 53.1 |
| 33.3 |
| 31.8 |
| 31.8 |
| 30.2 |
| 26.6 |
| 24.6 |
| 23 |
| 21.8 |
| 19.7 |
| 19.7 |
| 15.9 |
| 15.8 |
| 15.8 |
| 15.5 |
| 15.3 |
| 14.6 |
| 14.1 |
| 14.1 |
| 14 |
| 13 |
| 12.4 |
| 12.6 |
| 12.5 |
| 11.9 |
| 11.6 |
| 10.6 |
| 10.2 |
| 9.8 |
| 9.5 |
| 8.8 |
| 8.8 |
| 7.7 |
| 6.8 |
| 6.3 |
| 4.7 |
In summary:
In the United States, any person is considered self-employed for tax purposes if that person is running a business as a sole proprietorship, independent contractor, as a member of a partnership, or as a member of a limited liability company that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay Social Security and Medicare taxes in the form of a SECA (Self-Employment Contributions Act) tax.
In 2016, the median income for individuals self-employed at their own incorporated businesses was $50,347. For individuals self-employed at their own unincorporated firms, this figure was $23,060.
Generally, only 92.35% of the self-employment income is taxable at the above rates. Additionally, half of the self-employment tax, i.e., the employer-equivalent portion, is allowed as a deduction against income.
The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011, for a total of 13.3%. This rate will continue for income earned in calendar year 2012, due to the Temporary Payroll Tax Cut Continuation Act of 2011. Self-employed persons sometimes declare more Tax deduction than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses.
Self-employed persons report their business income or loss on Schedule C of IRS Form 1040 and calculate the self-employment tax on Schedule SE of IRS Form 1040. Estimated taxes must be paid quarterly using form 1040-ES if estimated tax liability exceeds $1,000.
A defined-benefit plan is a third option that has high contribution limits and acts like a traditional pension plan. Sole proprietors can also opt for a SIMPLE IRA, which allows them to contribute to employee retirement plans as well as their own retirement plan.
In non-metropolitan counties, the study found that increased levels of self-employment were associated with strong increases in per capita income and job creation and significant reductions in family poverty levels. In 1969, the average income of non-farm proprietors was $6,758 compared to $6,507 earned by salaried employees; by 2006 the difference in earnings widened to $12,041 in favor of salaried employees. The study notes that the gap could be due to underreporting of income by the self-employed. Alternatively, low-productivity workers could be losing their jobs and are forced to be self-employed. Further, some research shows that higher local unemployment rates lead workers to self-select into self-employment, as does past unemployment experience. Federal Reserve Bank of Chicago, Self-Employment as an Alternative to Unemployment, December 2003
In addition, Article 53 of the Treaty on the Functioning of the European Union (TFEU) provides for the free movement of those taking up and pursuing activities as self-employed people. It stipulates: "In order to make it easier for persons to take up and pursue activities as self-employed persons, the Council shall… issue Directives for the mutual recognition of diplomas, certificates and other evidence of formal qualifications".
The self-employment form of work does not group homogenous workers. As indicated by the European Commission in 2010, there are "different understandings and definitions of the term self-employment across the countries, with a number of different subcategories defined: for instance, according to the legal status of the enterprise, whether the business has employees or not (employers versus own-account workers) and/or the sector in which the business operates. Some countries also make the distinction between self-employed status and the status of 'dependent self-employed' (e.g. Spain, Italy), where the self-employed person works for only one client. Others distinguish self-employment which is carried out in addition to paid employment (e.g. Belgium)".
“Schijnzelfstandigheid” is a Dutch term that refers to false self-employment or bogus self-employment. It occurs when a person is officially classified as a freelancer or self-employed worker but, in practice, works as a regular employee under the same conditions, without the rights or benefits of an employee, such as paid leave, social security, or protection against dismissal.
This situation often arises when employers try to avoid taxes, social security contributions, or labor regulations by hiring workers as independent contractors instead of offering them a formal employment contract. Schijnzelfstandigheid can lead to legal issues, as it is considered an abuse of labor laws designed to protect workers.
In recent years, many countries, including the Netherlands, have tightened regulations to prevent and address this problem, seeking to ensure that workers who should be classified as employees are not wrongly treated as independent contractors.
The European Parliament Resolution on Social Protection for All has stated that: "the absence of a clear national definition of self-employment increases the risk of false self-employment" and the European Parliament Resolution on the Renewed Social Agenda invites Member States to take initiatives that would "lead to a clear distinction between employers, genuine self-employed and small entrepreneurs on the one hand and employees on the other".
Self-employment is mostly regulated at national level only. Each authority and individual body applies its own legal and regulatory framework provisions, which may vary depending on their remit or policy area (tax law, social security, business law, employment market, insurance). The provisions related to self-employment vary therefore widely between the countries. As indicated by the European Foundation for the Improvement of Living and Working Conditions (Eurofound) in 2014, the diversity of the self-employed has attracted diverse forms of regulation, mainly decided at national level: "EU employment law addresses the self-employed mainly in narrowly specific areas such as free movement and equal treatment".
As recommended by the European Forum of Independent Professionals (EFIP), the EU, employers', employees' and self-employment representatives should adopt a Europe-wide joint recognition of genuine self-employment and a common definition that includes a shared terminology for the various sectors.
According to a 2016 study by the McKinsey Global Institute, there are 14 million "independent workers" in the United Kingdom, although the House of Commons Work and Pensions Committee reported in 2017 that 5 million people, 15% of the workforce, were self-employed.House of Commons, Self-employment and the gig economy: Government Response to the Committee’s Thirteenth Report of Session 2016–17, accessed 11 January 2023 The Office for National Statistics referred to a "rapid growth" in self-employment between 2001 (3.3 million people, or 12% of the workforce) and 2017 (4.8 million people, or 15.1% of the workforce, with London, Yorkshire and the Humber and the South East regions exhibiting the greatest rates of increase.Office for National Statistics, Trends in self-employment in the UK, published 7 February 2018, accessed 2 June 2023 Many people living with disabilities choose to be self-employed.Boylan, A. and Burchardt, T. (2002), Barriers to self-employment for disabled people, Report for the Small Business Service, available at http://www.berr.gov.uk/files/file38357.pdf , accessed January 2010
Self-employment, while popular, does come with several legal responsibilities. When , clearance may sometimes be required from the local authority to use part of the home as business premises. If the self-employed person holds records of customers or suppliers in any electronic form they are required to register with the Information Commissioner's Office. Other legal responsibilities include statutory public liability insurance cover, modifying premises to be disabled-friendly, and the proper recording and accounting of financial transactions. Free advice on the range of responsibilities is available from government operated Business Link centres.
The UK government has stated that "self-employment is not the right choice for everyone".
The Office for National Statistics has observed that information on levels of income from self-employment is limited and largely comes from surveys.
The House of Commons Work and Pensions Committee reported in May 2017 that some self-employment could be described as "bogus", noting that "a minority of companies" promote the idea that flexibility in employment can only be secured through self-employment, and that such misuse of self-employment status "passes the burden of safety net support to the welfare state at the same time as reducing tax revenue".
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