Understanding the basics of self-employment

You plan to be self-employed, but how is that different from a traditional employee relationship? Here are the essentials.

First, there are three main forms of business you can use:

1. Sole proprietorships are businesses where the individual is the business – there is no legal distinction between the two. You can often operate under your own personal name without having to register a business (when you add something to the name, registration is required) and report your gross income, expenses and resulting net income as business or professional income at tax time.
2. Partnerships are similar to sole proprietorships, except they have more than one owner, with taxable income and liability being shared amongst owners.
3. Corporations are separate legal entities from the actual business owner. This form of business offers added legal protection, but in the early years a sole proprietorship or partnership will often offer more tax advantages.

Second, when you are self-employed you are responsible for taking care of bookkeeping, tax filings, any required licensing and record-keeping.

Finally, self-employment differs from full-time employment in a number of important ways. You are not “hired” for jobs, but have contracts.

You will want to build standard employment benefits like health & dental, life & disability insurance, vacation pay, along with other costs like marketing and sales, into your pricing.

Because the work is contracted, companies you work with do not have to provide the same assurances that full-time employees receive.

As an independent contractor, you do not receive benefits, sick pay, or statutory pay, unless these have been negotiated (this is why independent contractor hourly rates are usually higher than employee rates).