Difference between Independent Contractor and Self Employed

Key Takeaways

  • Self-employed are individuals who can dictate their working method and the work they need to do. For example, all independent contractors are self-employed, but not all self-employed people are individual contractors.These job categories are similar in nature except for a small difference that self-employment does not always offer services to the general public.Individual contractors may require special licenses or educational requirements necessary for the job undertaken. Self-employed people may not always need specializations. They, however, need experience and expertise in certain areas.

Independent contractor vs Self-employed Comparative Table

Infographics

What is an Independent Contractor?

Individual contractors are people who have the power to dictate what job to do and how they will do it. The right of the hiring entity involves controlling or directing the result of the work only. Also, independent contractors offer services to the general public. Professionals such as doctors, lawyers, accountantsAccountantsAn accountant is a finance professional responsible for recording business transactions on behalf of a firm, reporting the firm’s performance and issuing financial statements. Thus, an accountant plays an important role whether it is a small domestic entity or a large multinational company.read more, contractors, subcontractors, and dentists belong to this category. Independent contractors receive payment based on the work they do. This payment may be on an hourly basis or per-project basis. However, whether or not they are employees in their field needs analysis on a case-by-case basis.

They cannot enjoy health insurance or other benefits provided by their employer because they are not typically on a payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more. Regardless of the name, if an employer-employee relationship exists, it is not under individual contracts. Therefore, they do not have to pay self-employment taxSelf-employment TaxSelf-employment tax is the tax towards social security and Medicare, paid by a self-employed person who has net earnings of $400 or more for the concerned tax period towards the federal government reported through form 1040 schedule SE.read more. In addition to it, the employer withholds earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more received by an employee and pays income taxes, social security taxes, and Medicare taxes out of it. If an employer controls the services on the terms and the job method, it is not an independent contract even if there is freedom of action.

What is Self-Employed?

Self-employed people predominantly carry on a trade or business as sole proprietors or as independent contractors. They can also be people who run a business (irrespective of whether they are part-time or gig workers). They can also be members of a trade or business partnership. Most of them do not work for an employer who provides a steady wage or salary. Instead, they earn money by contracting with employers and supplying goods or services to various other businesses or clients. Self-employed individuals must also pay their own self-employment taxes, including Social Security and Medicare.

A self-employed person must normally file a yearly tax return and pay an estimated tax quarterly. Self-employed people generally pay both income tax and self-employment tax. Especially if net profits from self-employment are $400 or more, the individual must file an income tax. If the earnings are less than $400 through self-employment, individuals must still file an income tax return if they satisfy the other filing requirements mentioned in the Form 1040 and 1040 SR instructions (U.S).

Independent contractor vs Self-employed Similarities

This has been a Guide to Independent contractors vs self-employed. Here we discuss the differences between the two with infographics and a comparative table. You may also have a look at the following articles –

  • Independent Contractor vs Sole ProprietorIndependent Contractor Vs Sole ProprietorThe primary difference between a sole proprietor and an independent contractor is that the sole proprietor receives earnings mainly from selling their business’s products and services. At the same time, independent contractors are engaged only in providing professional services to clients like other organizations and individuals on a contractual basis and receive a 1099-NEC form from the contracting employer or service receiver reporting non-employee compensation and do not receive business income via sale of goods and services.read moreIndependent Contractor vs EmployeeIndependent Contractor Vs EmployeeAn employee is a person hired by an employer to work for them in exchange for a fixed remuneration. Based on their qualifications and experience, the employer hires an employee to work for them regularly. On the other hand, independent contractors work on a freelance basis, buy their tools, pay their taxes, work however they please, and are paid per project.read moreSole Proprietorship