Independent contractor vs Self-employed

Difference Between Independent Contractor and Self Employed

An independent contractor is hired to render goods or services to another entity, while self-employed is a term used to denote individuals who enjoy the right or power to control or direct the outcome of the work, excluding the factors of what will be done and how they will do it.

The difference between the two is that all individual contractors can be self-employed, but all self-employed people need not be independent contractors. The major difference in terms of taxation is that independent contractor vs self-employed tax is to be paid on their own in contrast to how the tax structure is for employees.

• 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.

What is an Independent Contractor?

To understand the difference between independent contractors and self-employed, it is important to understand their functionalities individually. Let us first take a deep dive on the former to clearly understand the differences.

• 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, accountants, 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 payroll. 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 tax. In addition to it, the employer withholds earnings 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?

Now that we understand the intricacies of independent contractors, let us understand the ebbs and flows of self-employed through the detailed discussion below.

• 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).

Comparative Table

Let us compare the two types including independent contractor vs self-employed tax and other such factors through the comparative table below. It shall help us categorize differences in terms of different factors revolving around these two concepts.

Particulars	Independent Contractor	Self Employed
Meaning	They are individuals who decide what work is to be done and how it is done (i.e., the work process).	They also dictate their working conditions similar to independent contractors but predominantly lean towards trade and business.
Fundamental difference	All independent contractors are self-employed people	Not all self-employed people are independent contractors primarily because they may not always offer services to the general public despite not working as an employee.
Examples	Examples of independent contractors include doctors, dentists, lawyers, accountants, etc.	Examples of self-employed persons include people who own businesses, gigs, sole proprietors, people involved in partnerships, etc.
Qualifications and Experience	Skilled jobs such as a doctor, lawyer, or accountant need specific educational qualifications to work as independent contractors.	Businesses may not need individuals with specified degrees, but those involved in service delivery require expertise and experience. For example- the hotel and hospitality industry.
License requirements	Certain professional services need a licensed practitioner to work in that field as independent contractors. Medical, legal and financial professions are a few examples.	A license is required to work for businesses that work in the food industry, even if one is self-employed.
Element of profit	Independent contractors fix payment for the services they are required to deliver. If it requires extreme skills, time, and effort, the pay quoted will be higher to match it. The amount quoted becomes part of their fee or commission and will not fall under profit.	Self-employed individuals often make a profit, especially in the trade or business industries. This is because they do not charge money in terms of "fees."

Infographics

The infographics below shall give us a detailed understanding of the comparison in terms of the differences in the implications and fundamentals of these concepts.

Similarities

We have been discussing about the differences in the two concepts. However, there are a handful of similarities between both these concepts as well. Let us understand the similarities to eliminate any confusion around these concepts.

Particulars	Independent contractors	Self-employed persons
Benefits	Independent contractors have various benefits such as a fixed rate per work basis, deciding the working hours and schedule, choosing their own work environment, etc.	Self-employed persons also have benefits such as flexible working hours, payment according to work done or services offered, freedom of choice, and being one's own boss etc.
Legal protection	Independent contractors are exempt from FLSA (Fair Labor Standards Act) requirements, which means there is no guaranteed minimum salary, overtime pay, unemployment insurance, or workers' compensation.	Employee benefits are irrelevant, including sick leaves; bonuses are not applicable for self-employed individuals.
Monetary compensation	They get paid whatever amount was quoted in the contract. However, they do not get paid extra if the work done exceeds expectations (generally speaking).	Self-employed individuals such as artists may get paid extra for the work exceeding expectations. However, they also do not get an additional amount of money for the job done in most cases.
Tax	Independent contractors are taxed under the category of self-employed people as there is no employee relationship present.	Self-employed individual Income is taxable. Unlike employees, no employer is withholding the earned money.

Recommended Articles

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 Proprietor
• Independent Contractor vs Employee
• Sole Proprietorship