Self-employment is the individual pursuit of capitalism. To be self-employed, an individual is normally highly skilled in a trade or has a niche product or service for their local community. With the creation of the Internet the ability for an individual to become self-employed has increased dramatically. The amount of money spent on self-help, self-improvement and training materials has reached the billions in the past decade.

Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade or business that they operate personally.

To be self-employed is not the same as being a business owner: A business owner is not required to be hands-on with the day-to-day operations of his or her company, while a self-employed person has to utilize a very hands-on approach in order to survive.

Taxation in the US

In the United States, a person is considered self-employed for tax purposes if that person is running a business as a sole proprietorship, independent contractor, as a member of a partnership, or as a member of a limited liability company that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay Social Security and Medicare taxes in the form of a SECA (Self-Employment Contributions Act) tax.

The self-employment tax in the United States is currently set at 15.30% which is the equivalent of the combined contributions of the employee and employer under the FICA tax. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. The social security portion of the self-employment tax only applies to the first $97,500 of income for the 2007 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax.

Half of the hypothetical self-employment tax is allowed as a deduction against self-employment income so only 92.35% of the self-employment income is taxable at 15.30%, an effective tax rate of about 14.13%. However, this benefit disappears if self-employment income exceeds $105,577, since the entire applicable amount of $97,500 will be taxed at 15.30%.

Self-employed persons are sometimes eligible for more deductions than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses. However, again, the advice of an expert may be worth the money it costs.

Self-employed persons report their business income or loss on Schedule C of IRS Form 1040 and calculate the self-employment tax on Schedule SE of IRS Form 1040. Estimated taxes must be paid quarterly using form 1040-ES if estimated tax liability exceeds $1,000.

Many self-employed individuals choose to establish a corporate entity, in order to have more control over their tax liability. The advantage of a corporate structure is the ability to pay out profits as salary, which is subject to FICA tax, and dividends (called "distributions"), which are not subject to FICA tax. For example, if the business owner paid out 100% of profits to herself as a dividend, she could avoid approximately $14,900 in FICA taxes (both the employee and employer portions) on $100,000 in profits. However, since dividends are subject to double taxation at the corporate and personal level, it is advisable to seek professional tax advice on the most favorable distribution of profits.