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You Know You're Self-Employed If...

Updated on June 21, 2009

A Little Background

I've been self-employed as a computer consultant for almost 20 years. To me, self-employment means:

  • purchasing your own health insurance for you and your family,
  • being paid 100% on commission rather than an hourly wage or salary,
  • being the sole decision maker for the company,
  • setting your own hours,
  • having the majority material investment in the company, and
  • getting paid on 1099s rather than W2s

In this article I'll discuss what it means to be self-employed. Regardless of what your resume might say, these are my opinions based on my experience. Uncle Sam provided a little input along the way. If you have an opinion on the subject, I'd be happy to hear from you.

Buy your Own Health Insurance

Admittedly this is a gray area. Coverage may come from a spouse's job; that still counts.This is a sore point for most entrepreneurs because we just can't get a group rating and our insurance costs virtually drive us out of business. I see a 10%-30% increase each year. The thought of hiring an entry-level employee and providing them with coverage is daunting.

I assert that spending enough time at one employer/customer to be covered by their policy equates to not being self-employed. I have met many job-shoppers who move between assignments under the umbrella of a contract agency. The agency finds the work and places the contractor on-site. Many agencies also offer health insurance to their contractors. It's a nice way to earn a living, but it's not equivalent to paying your own way.

Refusing to carry insurance doesn't count.

Work 100% on commission

Drawing a salary implies the possibility of getting paid without working. Stay home sick; get paid anyway. That's not inherently a bad thing, but it' a level of support that a self-employed person doesn't have. Don't even get me started on vacation time. Certainly salaried employees work hard, but they always have the cocoon of the company to nestle in. On the other hand, the cocoon tends to unravel a bit these days.

The true risk-takers among us are on a 100% commission-based compensation structure. If you don't work, you don't get paid. The upside is that you get to keep everything that's left over at the end of the month. Conversely, you have to make up the difference in the event of a shortfall. I think the reason most of us aren't self-employed is because we don't want our boss asking for a little help with the electric bill.

Have the Last Word

You don't need the first word, but you'd better have the last word. Customers, family, vendors are happy to give you advice. If anyone else is deciding what jobs to bid on, what jobs to take, and what customers to fire, you're probably not self-employed.

Set Your Own Hours

If someone gives you a desk and a chair in their office, then tells you when to sit there, you're probably not self-employed. The IRS agrees with me on this point. A key checkpoint applied by the Feds relates to whether or not you're told to be somewhere at some time. Giving up the freedom to set your own hours is the first step toward becoming an employee. When you're self-employed, plans become your responsibility.

Have a Material Investment in the Company

Look around your office. If everything is in your name, you're probably self-employed. If  someone else bought all your stuff for you, well...

Get Paid on 1099s

The Federal Government asked me to toss this in. A prime indicator of self-employment, according to the IRS, is whether or not your employer/customer takes taxes out of your check. If you see those deductions every month, you can expect a W2 at the end of the year. Otherwise, look for a 1099 and be sure to file your quarterly withholding statements.

Interestingly enough, the online job sites like Monster, Dice, and CareerBuilder support searching by W2 vs 1099. The types of jobs are inherently different. Employers understand that some folks won't work on W2s.

Regarding federal taxes, Schedule C is the "Self-employed" form. If you're not fillig out a Schedule C, you might not be self-employed. There is a "Self-employed credit" for filing it, but also a few penalties, namely the responsibility to make up the 7+ per cent of the Social Security tax that your employer typically pays.

Let's Hear from You

In Cool Hand Luke, Strother Martin said the famous line "What we have here is failure to communicate." Hopefully I've done a little better than that. What are your thoughts on this subject?


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