Self Employed

Self-Employed Individuals

There are two types of self-employed people, from the IRS standpoint.  Either you are a percentage shareholder in a corporation/partner in a partnership, or you are a sole proprietor.

Both are still required to file tax returns.

However, the key difference with sole proprietors is that they are required to pay Social Security and Medicare Tax if they file a profit from their business.  Most people who are sole proprietors tend to be those who are running home-based businesses, usually not full time.  Occupation type does not matter as to the chosen form of tax reporting method, but it is true that the higher the profit filed from a sole-proprietorship, the higher the federal, state, Social Security, and Medicare Tax that is liable to be paid.

Those who are self-employed through an IRS approved entity (i.e., an LLC, a C-Corporation, an S-Corporation, etc.), are NOT required to pay any Social Security or Medicare Tax on the profit they file from the entity.  However, if the owner or any employee draws a salary of any kind from the chosen entity, Social Security and Medicare taxes are liable to be paid by both the employer and the employee.

That is the chief difference with regards to taxes for self-employed individuals; however, personal legal liability is a completely different issue.  Most professionals seek limited liability due to the nature of their chosen profession (doctor, lawyer, insurance agent) and have malpractice insurance policies in place for such unforeseen personal injury claims. However, most self-employed individuals seek an initial but robust form of legal protection from personal liability claims in the type of entity they choose for conducting their business.  Any business practices attorney can advise you on that particular matter.