While the terms “self-employed” and “business owner” are often used interchangeably, the IRS views them differently. Self-employed individuals typically work alone and report earnings on their personal tax returns. Business owners may operate a more structured entity, possibly with employees, and may file separate business tax returns. Each structure comes with unique tax implications, including how you report income and available deductions. It also determines whether additional filings, like payroll taxes or corporate returns, are necessary. Understanding the tax differences between being self-employed and owning a business helps with filing and long-term financial planning.
A financial advisor can provide personalized guidance to help you with these distinctions and optimize your tax strategy year-round.
Being Self-Employed vs. Being a Business Owner
The terms “self-employed” and “business owner” both describe individuals who work for themselves, but there are key distinctions.
In general, self-employed individuals operate as sole proprietors or independent contractors. They often provide services directly and do not have employees. Examples include freelancers, consultants or gig economy workers. These individuals typically perform most, if not all, aspects of their work. They typically report income and expenses on Schedule C with Form 1040.
On the other hand, a business owner often operates a more structured enterprise. This could mean owning a company that employs staff, sells products or provides services under a brand name. Business owners may operate through legal entities, such as LLCs, S corporations or C corporations. They may also file separate business tax returns. For example, a graphic designer who starts an agency, hires other designers and markets services under a business name is an owner, per IRS regulations.
While all business owners are technically self-employed, not all self-employed individuals operate structured businesses with employees or legal separation from their personal finances.
Tax Differences: Self-Employed vs. Business Owner
The IRS treats self-employed individuals and business owners differently in terms of tax reporting, available deductions and filing requirements. Knowing these differences can help you reduce your tax liability and avoid costly mistakes.
Tax Reporting
Self-employed individuals typically report their income and expenses on Schedule C as part of their personal Form 1040. Net profit is subject to self-employment tax (15.3% for Social Security and Medicare), in addition to income tax.
Estimated quarterly tax payments are also required to cover both self-employment and income taxes throughout the year.
Business owners operating under an LLC, S corp or C corp may file separate business tax returns.
- LLCs typically pass income through to the owner’s personal return unless taxed as a corporation.
- S corporations allow owners to pay themselves a salary (subject to payroll taxes) and take additional profits as distributions, which are not subject to self-employment tax.
- C corporations file their own return (Form 1120) and face double taxation when they distribute profits as dividends.
Deductions and Benefits
Self-employed individuals are eligible to deduct business expenses, such as home office costs, internet and phone bills, mileage and self-employed health insurance premiums. They can also contribute to retirement accounts like SEP IRAs or Solo 401(k)s.
Business owners may access broader deductions, including employee salaries, insurance premiums and benefit contributions. S corp owners may also be able to reduce self-employment taxes through reasonable compensation strategies and distributions.
Payroll and Employment Taxes
Self-employed individuals are responsible only for themselves and do not file employment tax forms.
Business owners with employees must handle payroll taxes, Form 941 filings, W-2 issuance and possibly state unemployment insurance requirements.
Should You Switch From Self-Employed to Business Ownership?
The transition to a structured business makes sense when your work grows beyond a one-person operation. Liability protection and tax efficiency may also become more important. Consider these factors when deciding which path makes sense for your business.
When It Makes Sense to Switch
If your income is growing, you’re hiring, or building a brand, forming an LLC or S corp may offer liability protection and tax benefits. For example, a freelance developer earning $150,000 a year may convert to an S corp. They can reduce self-employment tax by splitting income between salary and distributions.
When Staying Self-Employed Makes Sense
If your income is modest, you have no plans to hire employees and your business remains simple, remaining a sole proprietor keeps tax filing easy and costs low. For instance, a part-time Etsy seller making $15,000 a year might prefer to remain self-employed. This saves them the administrative burden of forming a company.
Every situation differs. A tax advisor or planner can help weigh your options based on your income and business goals.
Frequently Asked Questions
Is a Self-Employed Person a Business Owner?
Yes, all self-employed individuals are technically business owners. However, the IRS and legal structures make distinctions based on business complexity, entity type and tax filing requirements.
What Is the Best Business Structure for Tax Savings?
There is no one-size-fits-all answer. S corporations can offer savings on self-employment taxes, while LLCs offer flexibility and liability protection. The right choice depends on your income level, business goals and complexity.
Do I Need to Register My Business If I’m Self-Employed?
Not necessarily. Many self-employed individuals operate as sole proprietors and do not need to formally register a business entity. However, registering a DBA (“doing business as”) or forming an LLC can help with branding, legal protection and tax planning.
Bottom Line
Self-employed individuals benefit from simplified tax filing but may face higher self-employment taxes. Business owners with formal structures like LLCs or S corps may unlock additional deductions and tax-saving opportunities but face added responsibilities and compliance. Knowing the difference between self-employed vs. business owner taxes is key to choosing the right business path and filing accurately.
Tax Planning Tips
- Some financial advisors have tax expertise and can help you build tax efficiency into your financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re on the edge of a higher tax bracket, shifting income into the next year or accelerating deductible expenses into the current year can help manage your marginal tax rate. This strategy especially benefits self-employed individuals and retirees with flexible income.
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