Sometimes, the terms self-employed vs small business owner are used interchangeably. Many wonder if there’s a real difference between the two or if they’re both referring to a person who earns an income without working for another person or company.
There is a difference between the self-employed and small business owners, and it all comes down to how many people are involved in and employed by the business.
The answer is pretty straightforward, but first, let’s consider what the IRS – perhaps the ultimate authority on what does and does not constitute a legitimate business operation – defines self-employed vs small business owner as.
Self-employed vs small business owner
Here’s what the IRS says about the definition of self-employed:
Generally, you are self-employed if any of the following apply to you.
- You carry on a trade or business as a sole proprietor or independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
Here is what it says about business structures with employees (small businesses):
“As a business owner, when another person performs work for you, you must first correctly classify that person as an independent contractor or employee. If the person is an independent contractor, refer to Forms and Associated Taxes for Independent Contractors for your tax responsibilities. If the person is classified as an employee you must have an Employer Identification Number (EIN). Your tax responsibilities include withholding, depositing, reporting, and paying employment taxes.”
The major difference between self-employed vs small business owner
Self employed entrepreneurs are those who do business as a sole proprietor or independent contractor or are in part-time business for themselves. They do not have employees and do not hire contractors in most cases.
Small business owners are those who own a business and hire employees, contractors, or both. They have Employer Identification Numbers (EINs) in addition to their personal Social Security Numbers that define their company as a business and not an individual earning self-employed income without hiring employees.
Many people start as self-employed entrepreneurs and grow into small business owners over time.
Freelance and consulting positions are especially likely to start this way, with one person providing services on a freelance basis to clients. Then, the demand for their services grows, and the additional income from increased work allows them to hire a contractor for help. Soon, they are able to start a business with their services and hire employees to help.
Examples of self-employed vs small business owner companies
Freelancers, independent local service providers, artists, eCommerce, home businesses, and more are examples of businesses or operations the self-employed might own.
Shops, law firms, medical practices, large local and nationwide service providers, agencies, consulting firms, food and restaurant establishments, and more are examples of small businesses that usually employ at least one person.
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