Phenomena like the great resignation led to the unprecedented growth of the gig economy.
This growth has spurred the creation of new laws that define and protect gig workers.
To understand the difference between self-employed and independent contractors begin with their tax obligations.
Before examining whether independent contractors are self-employed, it is essential to define self-employment and independent contracting.
So are independent contractors self-employed?
The following article examines the various aspects of independent contracting and self-employment and highlights the differences.
- What Is the Legal Definition of Self-employment?
- Are Independent Contractors Self-Employed?
- What Type of Employee Is an Independent Contractor?
- What Is the Difference Between an Independent Contractor and Self-Employed?
- Is It Better To Be an Employee or an Independent Contractor?
- How Do I Know If I Am Self-employed?
- Other Things That Independent Contractors Might Need
- How To Become an Independent Contractor
- Wrapping Up
What Is the Legal Definition of Self-employment?
Self-employment can be legally defined as working in a trade or business as an owner, an independent contractor, or a partner.
The law also considers people in business solely for themselves, such as gig workers or part-time employees, as self-employed individuals.
Are Independent Contractors Self-Employed?
The law classifies independent contractors as self-employed individuals.
Regardless of your profession, if your services directly cater to the public but your employer has no control over what you do or how you do it, you are an independent contractor.
The entities that offer independent contractor jobs can only dictate and control the result of the work.
What Type of Employee Is an Independent Contractor?
The legal contractor definition states that an independent contractor is an individual hired by a business to execute a specific task.
The employee solely determines the method or tools used to perform said task.
The independent contractor also determines other aspects of the assignment such as the location and work hours.
Independent contractors are also free to work for multiple employers.
What Is the Difference Between an Independent Contractor and Self-Employed?
While the legal definition classifies independent contractors as self-employed, there are notable differences between these two parties.
For instance, the self-employed work for themselves in businesses they fully or partially own.
In contrast, independent contractors work for other entities and are contractually bound to produce specific results.
Also, while independent contractors directly offer services to the general public, self-employed people may not.
As a business owner, a self-employed individual could hire an employee or an independent contractor to offer the service provided by their business.
Can a Contractor Be Self-Employed?
Contractors can be self-employed to make it easy for their clients.
It’s also easy for you to work effectively since you’ll not have anyone overseeing your operations.
Is It Better To Be an Employee or an Independent Contractor?
To be an employee or an independent contractor depends on an individual’s circumstances and preferences.
Both employment and independent contracting have their benefits and drawbacks.
Looking at the benefits of each may reveal which form of employment suits you best.
Here are some of the factors to consider when comparing the two:
Payment, Benefits, and Taxation
Independent contractors and employees get different taxation, benefits, and payment treatment.
Every employee is always on the company payroll.
They receive salary or hourly wages and the organization withholds appropriate taxes.
The employer also pays for their mandatory benefits such as health insurance and paid vacations.
On the other hand, the independent contractor receives the agreed-upon wages and pays their taxes.
They pay both self-employment and federal income taxes.
Training and Onboarding
Most gig companies provide independent contractors with information that aids in the completion of a particular task or project.
In contrast, full-time employees usually go through a lengthy onboarding process to understand team dynamic intricacies, overall goals, and company culture.
Employment offers workers stability that is lacking in independent contracting.
For instance, the recent legislation impacted the gig economy in unfavorable ways for some contractors.
The law reduced job opportunities, reduced benefits, and decreased pay for some gig workers.
Employees rarely have to worry about legislative changes that may alter how they work or their benefits.
Labor laws protect employees, and employers have to adhere to these laws or risk fines.
Employees often have to stick to specified hours per week and complete tasks while being managed by their employers.
In contrast, independent contractors have a flexible schedule.
They work at their convenient time and for as long as they want, as long as they produce the desired result.
How Do I Know If I Am Self-employed?
Given the similarities between independent contracting and self-employment, identifying the category to which you belong may be challenging.
The following characteristics should help you identify your proper designation.
You Have No Employer
Self-employed people have no organization to answer to.
A self-employed person sets their hours and decides which tasks to complete and how to complete them.
As a self-employed person, your main responsibility is to develop business goals and lay out a plan for your business’s future.
You Bear All the Risk
If the buck of your business stops with you, you may be self-employed.
As a self-employed person, any action you take determines the trajectory of your business.
You reap the wins but also take responsibility if anything goes wrong.
You Hire Employees or Independent Contractors
Self-employed people often hire others to help deliver their company’s goods and services.
In some instances, a self-employed person may never have to provide a service to the general public.
Instead, they facilitate service delivery and handle the logistics part of the business.
If you fit any of the above criteria, you may be self-employed.
Other Things That Independent Contractors Might Need
The following is additional information you may need to navigate the ever-changing gig economy world.
Do Independent Contractors Pay Taxes?
All independent contractors must pay the self-employment tax consisting of Medicare, Social Security, and a personal income tax.
As an independent contractor, you are responsible for calculating your taxes using tools such as Schedule SE or estimating the equivalent amount deducted by the employers within your industry.
Do Independent Contractors Need a Business Structure?
Independent contractors don’t need business structures.
They can perform their duties and get paid according to a signed agreement.
However, a business structure helps contractors keep track of their income and expenditures and pay taxes.
You can create a business structure without registering your operations with the state.
Do Independent Contractors Need Health Insurance?
Just like any other employees, independent contractors need health insurance. Uninsured contractors may accrue significant medical bills.
Besides, some states penalize individuals who bring in income but remain uninsured. Several self-employed insurance plans offer individual and family plans.
How To Become an Independent Contractor
Are you looking to transition to the independent contractor field and aren’t sure where to begin?
The following steps should make your transition smooth.
Learn What Gigs Are
Start with understanding the definition of a gig.
Gigs are short-term projects offered at a fixed price.
Gig workers often go from project to project and may pick jobs from different employees.
Pick Your Field
There are numerous types of gig workers, each specializing in different fields.
Try to learn as much as possible about the various areas before picking a niche, as some gigs are more lucrative than others.
Set Up Your Business
Setting up a business structure makes tracking your income for tax purposes easy.
So, look into state regulations in case you need to register or get business insurance.
Search for Work
Seek jobs from all the available freelancing websites.
Referrals are another excellent source of gig work.
Try to join networks with many freelancers, as it may be the key to getting more jobs.
Independent contractors can be self-employed.
Every contractor has tax obligations and specific work processes.
The self-employed ones have more control over their businesses.
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