What Is Self-Employment? Definition and Common Types

By Indeed Editorial Team

Updated December 12, 2022

Published July 26, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Self-employment is a key element in the labour market activity and a significant contributor to employment numbers. Various factors continue to impact the rapid increase in self-employment, including economic downturn, an aging population and the increase in industries that are more amenable to self-employment. In this article, we discuss the meaning of self-employed, explain the difference between being an employee and being self-employed, explore the main types of self-employment and list essential skills for self-employment.

What is self-employed? (meaning and definition)

Self-employed people work independently to operate business or professional activities themselves, as opposed to working for an employer. Self-employment encompasses a wide range of activities, but what differentiates this type of work in the labour market is the ability to generate income from individually established products or services. That means a self-employed person has the freedom to choose where and when to work.

Related: How to Become an Entrepreneur (Definition and FAQs)

Employee vs. self-employed

Here are key elements that differentiate self-employed individuals from employees:

Flexibility and remote working

A self-employed person can select their preferred work environment. They may rent an office, find a shared workplace or work from home. It allows them to save a significant amount of time and money and improve productivity. Seeking a comfortable work environment helps self-employed people avoid distractions and remain focused to achieve results.

By comparison, an employee has limited choices for where and when they work. They typically work in the same work environment every day. This often involves a daily commute, which can be costly and time-consuming. They also have to work for fixed hours and only get a few vacation days in a year.

Tax deductions

Working as an employee relieves you from the responsibility of calculating and deducting taxes from your pay. Your employer does this on your behalf and sends a certain percentage of your salary to the government to pay your taxes. When you are self-employed, you become responsible for filing and paying your own taxes. If you are self-employed and working from home, you may claim against your income property taxes, insurance, maintenance costs, mortgage interest and home depreciation.

Job security

Relying on companies for employment can put you at risk of losing your job. In self-employment, you are your own boss. However, you may need to work harder to win clients, build a sustainable venture and keep business coming in.

Greater control

A self-employed person has the freedom to make important decisions that affect the future of their company, career and family. They may choose to expand, merge or sell their business without undue control of others. Conversely, an employee exercises control within the boundaries stated in their job description.

Use of skills

Self-employment enables you to exercise your skills, creating room for expansion and improving your skill set as needed. You can focus on what you love most and hire experts to handle elements of the business that may require extra skills. Self-employment can also help you hone your problem-solving skills. As an employee, you are tasked with handling specific responsibilities, which can limit your growth and skills to handle problems that may arise in the workplace. An employee can work only on the specifics of their job descriptions and must wait for other staff to provide solutions in areas that are outside their scope of work.

Possibility for increased earnings

Most organizations have a fixed salary or hourly rate for employees. The compensation plan may limit an increase in salary proportion to work expansion. Becoming your own boss gives you an opportunity to increase your earning potential, as you have the freedom to set your own rates. It could take time before your business earns a profit, but when you gain profitability, your earning potential is virtually limitless.

Growth and learning

Self-employment gives you the opportunity to hone your skills and gain hands-on experience through working in different business aspects. Owning a business requires you to be resourceful, which involves several elements like sourcing materials, marketing and bookkeeping. Gaining these skills is crucial for startups, and you can become an expert in your area of work. Being employed commits you to a specific role, but there is more room to grow and develop in your industry as a self-employed professional.

Additional factors

Other factors that distinguish self-employed people from employees include:

  • They are eligible to work for other organizations

  • They use their own tools and equipment

  • They are not subject to detailed instructions and supervision

  • They are not subject to the same employment legislation

  • They may choose to accept work or not

Related: Differences Between Being Employed vs. Self-Employed

The main types of self-employment

There are several self-employment structures. The most common types are:

Independent contractors

Independent contractors deliver specific tasks for clients and get paid for the jobs or projects they complete. Unlike employees, these individuals are not subject to workers' compensation, and they are eligible to pay their own taxes. Jobs suitable for independent contractors may include:

  • Accountants

  • Lawyers

  • Journalists

  • Doctors

  • Engineers

  • Architects

  • Interior designers

  • Machine operators

  • Information security analyst

Related: How to Become an Independent Contractor (With Tips)

Sole proprietors

Sole proprietors own and operate an enterprise by themselves. Although this is an individual business, a sole proprietor may choose to recruit staff to help them with their duties and responsibilities. Typically, there are no formal requirements to become a sole proprietor. Still, a sole proprietor enjoys the profit alone and is solely responsible for profits and losses in the business.

Related: The Top 20 Best Self-Employed Jobs With Added Salaries

Partnership

Partnerships involve two or more people who come together to run a business. The partners share profits and losses incurred by the business. Partnerships could be in different forms, such as where a partner contributes capital to the business and not to its operation. Others could be general partners who equally share the profits and liabilities of the company.

Related: Different Types of Partnerships in Business: A Definitive Guide

Freelancers

Freelancers are self-employed individuals who provide services to clients on a need-to-need basis. Freelancers have to manage various responsibilities and deadlines, and often enjoy the benefit of working remotely. Freelancers have immense earning potential depending on their line of work, their number of clients and the fees they charge. Their clients may also give them more opportunities through referrals and networking. Here are some common freelancing jobs:

  • Copywriters

  • Branding specialists

  • Photographers

  • Website developers

Freelancers sometimes enter into contracts with their clients detailing the scope of work, timeline, chargeable fees and other relevant contractual clauses.

Related: Freelance vs. Self-Employed Work: What's the Difference?

Essential skills in self-employment

The following are key attributes of becoming a successful self-employed person:

Flexibility

A self-employed individual has clear duties to perform that may shift because of disruptions or changes in the business environment. Once the business is established, it becomes the responsibility of the owner to control all the operations of the company. They must be ready to handle challenges as they arise, making flexibility an essential skill for self-employment.

Flexibility in self-employment fosters adaptability to changes and managing unforeseen issues. You can improve on this skill by setting goals, challenging yourself, being confident and overcoming obstacles.

Creativity

A self-employed person needs to be creative in order to find ways of growing their business. Creativity may help them develop new product lines or services, deal with clients' problems and find effective marketing tactics. Self-employed creativity is also essential when handling disruptions in the business environment.

Self-discipline

Self-discipline is an essential skill for a self-employed person. This is because a self-employed person fills multiple roles simultaneously, such as being a worker and a boss. They also need to maintain specific business hours, set and stick to a schedule and work independently.

Decision-making

A self-employed person makes decisions affecting their business. These decisions may affect a business positively or negatively. This means they need to cultivate excellent decision-making skills to enable them to make sound decisions.

Communication skills

Self-employed persons need to have excellent communication skills to enable them to communicate effectively with clients and other stakeholders. For instance, they may need to pitch their ideas to investors, convince prospective clients to hire them and manage relationships with existing clients. They also need to motivate their employees or subcontractors to help the business meet its objectives.

Self-motivated

As a self-employed person, it is your responsibility to schedule appointments, plan your work, set goals and implement them. You also need to coordinate many tasks to deliver quality work, and achieving this requires self-discipline, motivation and passion. To remain motivated, you need to create a plan, break the goals down, reward yourself and work in real-time.

Related: What Does Being a Self-Starter Mean?

Time management

You must be time conscious and prioritize your work to succeed in self-employment. Only accept the tasks that you can complete, and have a system in place to help you plan your work. It is also imperative that you schedule time away from your daily work to avoid burnout.

Read more: Time Management Skills: Examples and Definitions

Self-employment income taxation

When filing your income and self-employment taxes, make sure you report income separately for each source by filling in the gross income and net income in lines 13500 to 14300 of your benefit return and income tax. You may use the T2125 Statement of Business or Professional Activities form to compute the tax amount.

It is essential to understand that deductions may include only expenses incurred to generate revenue from self-employment income. You also need to show proof of how the expense was used to earn the income. When you have different business activities, you need to use different T2125 forms for each activity.

Related: How to Calculate Your Gross Monthly Income (With Examples)

Now that you know the meaning of self-employed and understand the essential skills and traits self-employed persons must have, you are better equipped to decide if self-employment is right for you.

Please note that none of the organizations, institutions or companies mentioned in this article are affiliated with Indeed.

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