The difference between sole proprietorship and self-employed is in the littlest of details. A self-employed person may be a sole proprietor, or they may fall into a different category such as an independent contractor or partnership member. To understand the differences, you need to look at what makes each business function unique.
Who is a sole proprietor?
The IRS defines a sole proprietor as someone who owns an unincorporated business alone. An unincorporated business is not registered with the state as a separate legal entity.
If you are a sole proprietor, you legally own all of your business's assets. You are also responsible for its debts, including taxes and legal costs.
All business income passes through to the sole proprietor's personal income. Therefore, unlike an incorporated business, a sole proprietorship doesn't pay corporate taxes. The sole proprietor pays taxes on the business income as individual income.
Read more about the advantages and disadvantages of sole proprietorship here.
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What does self-employed mean?
According to the IRS, someone is self-employed if they do business on their own or with a partner. A self-employed person may be:
- An independent contractor
- A sole proprietor
- A gig worker
- A member of a partnership
Partners are self-employed because the partnership offers goods and services directly to clients or customers. No employer oversight or control is involved.
These self-employment types look similar legally and financially. They are all pass-through entities, meaning they don't file separate corporate taxes. The self-employed person includes business income on their personal tax returns.
In practice, however, these business types can look vastly different. For example, an independent contractor typically provides a service to a business based on contract terms, whereas a sole proprietor typically sells goods or services without a contract involved.
So, what is the difference between self-employed and sole proprietors? Click here to know more.
Is self-employed and sole proprietorship the same thing?
The difference between sole proprietorship and self-employed can be challenging to see because all sole proprietors are self-employed, but not all self-employed individuals are sole proprietors.
A self-employed individual may be a gig worker or an independent contractor. Gig workers and contractors provide services to organizations, or to the public via another business.
For example, a rideshare driver is self-employed because the rideshare company does not dictate the driver's hours or make deductions from their pay. They serve the public through a company but are not employees.
An independent contractor is also self-employed. A common example is a freelance graphic designer, whom a company hires to create its new logo. They do the work to benefit an organization but are not employees because:
- The employer cannot dictate how or when they do their work
- The employer does not reimburse expenses or provide tools or supplies
- The employer does not provide benefits or paycheck deductions
- The contract covers a specific task with an end goal
- The relationship does not continue after the contractor fulfills the terms of the contract
- The work is not a key business function
If a business pays a contractor more than $600 in a tax year, it must issue the contractor a Form 1099 detailing taxable income.
Sole proprietors are also self-employed, but they are much less likely to do work for a business under a contract. Instead, they typically work directly with the public, selling goods and services on the open market.
A hairstylist or barber may be a sole proprietor. So might a solo tax preparer, plumber, or handyman.
Sole proprietors are self-employed, but unless they work for a business on a contract, they don't receive Form 1099s at the end of the tax year. They must track all of their income independently.
Do you pay more taxes as a sole proprietor?
There is no difference between sole proprietorships and self-employed individuals when it comes to income tax. Sole proprietors pay the same taxes as any other self-employed person, including an independent contractor. Their tax responsibilities include:
- Income tax (Form 1040, the individual tax return)
- Schedule C (Form 1040, Profit or Loss from Business)
- Schedule SE (Form 1040, self-employment tax)
The self-employment tax includes your Social Security and Medicare taxes. Employees share these taxes with their employers, but self-employed individuals must pay the employee and employer portions.
Because of the self-employment tax, sole proprietors typically pay more in taxes than employees in comparable jobs. For example, an independent accountant would pay more in taxes than someone working for a large personal tax preparation company.
However, sole proprietors do not pay more taxes than independent contractors and gig workers. All self-employed individuals must pay the self-employment tax, regardless of the type of work they do.
Self-employed individuals, including sole proprietors, usually pay quarterly estimated taxes. The IRS asks anyone who anticipates owing more than $1,000 at tax time to pay quarterly. Form 1040-ES on your annual tax return will help you determine estimated payments.
Talk to Skuad experts to learn how to manage taxes as a sole proprietor with Skuad.
How do I register as a self-employed or sole proprietor?
Now that you've learned the difference between sole proprietorship and self-employed, you can follow the path that's right for you.
The IRS will consider you a sole proprietor unless you register another business structure such as a corporation or limited liability company (LLC). Even if you consider yourself an independent contractor, you will be a sole proprietor for tax purposes.
Your home state may also have additional registration and licensing requirements for independent business owners
How Skuad can help
Skuad helps companies and sole proprietors to build dynamic global teams. With Skaud, you can hire, pay and manage talent across more than 160 countries, with worry-free tax law compliance.
To know more about Skuad, book a demo today.
What qualifies you as a sole proprietor?
You are a sole proprietor if you own and run an unincorporated business by yourself. The difference between sole proprietorship and self-employed is that the latter is a broader category. There are many types of self-employed individuals, including independent contractors and partners.
Do you pay more taxes as a sole proprietor?
Sole proprietors pay more taxes than comparable employees. They pay the employer and employee portions of Medicare and Social Security payments, via the self-employment tax. However, because there is no difference between a sole proprietor and a self-employed individual under tax law, you will pay the same taxes either way.
Is individual sole proprietor the same as LLC?
No. An LLC is a separate legal entity from its owners. Creating an LLC separates the owner's and business's assets, protecting the individual in case of lawsuits or bankruptcy. Sole proprietors have no such distinction.