Self Employed (Self-Employed)
The term self-employed refers to an individual that owns a business, or works as an independent contractor for another company. Self-employed individuals enjoy a number of freedoms; however, they also have several significant responsibilities too.
Self-employment provides business owners, freelancers, and independent contractors with the opportunity to “be their own boss.” While business owners will share in the profits of their companies, freelancers will be paid a fixed fee or charge an hourly rate for their services. Self-employed individuals enjoy a number of freedoms and directly benefit from their hard work and innovations.
These same individuals also have several responsibilities that corporations typically provide to their employees, including:
- Taxes: In addition to paying estimated federal and / or state income taxes on a quarterly basis, self-employed workers must also pay Social Security and Medicare taxes as part of SECA (Self-Employment Contributions Act).
- Health Insurance: the self-employed must also obtain health insurance or pay a tax penalty. The penalty grows to the higher of $695 per year (indexed for inflation thereafter) or 2.5% of income by 2017.
- Retirement: finally, self-employed individuals must also fund their own retirement account; the options available include Simplified Employee Pensions (SEP), 401(k) plans, SIMPLE IRAs, defined benefits plans, and Keogh plans.
Note: Freelancers and independent contractors are not entitled to worker’s compensation since they are not employees of a company.