Is Self-Employed and Sole Proprietorship the Same?

The terms self-employed and sole proprietorship are often used interchangeably, creating confusion for individuals starting their own ventures. While closely related, they refer to different concepts. Understanding the distinction has direct implications for legal liability and how one operates their business.

Defining Self-Employment

Self-employment is an employment classification. It signifies that an individual works for themselves, providing goods or services directly to clients or customers, rather than working for an employer who issues a W-2 form. This category includes a wide range of professions, from independent contractors and freelancers to doctors and lawyers who run their own practices.

The primary characteristic of being self-employed is the responsibility for one’s own tax obligations. This includes income tax and the self-employment tax, which covers Social Security and Medicare contributions. This tax is calculated on 92.35% of net earnings from the business. The tax itself has two parts: a 12.4% Social Security tax, which applies to the first $176,100 of earnings for 2025, and a 2.9% Medicare tax that applies to all earnings. This system is the self-employed individual’s equivalent of the FICA taxes paid by both employees and employers.

Understanding the Sole Proprietorship

A sole proprietorship is a type of business structure, not an employment status. It is the most common and simplest business form because it is the default for an individual who conducts business without establishing a formal legal entity. If you start a business by yourself, such as cleaning houses or providing graphic design services, and do not register as another type of entity, you are automatically a sole proprietor. No formal filing is required to create one.

The defining feature of a sole proprietorship is the absence of legal separation between the owner and the business. This means the owner is personally responsible for all business debts, lawsuits, and other obligations. If the business cannot pay its bills, creditors can pursue the owner’s personal assets, such as their home or personal bank accounts, to satisfy the debt.

The Relationship Between the Terms

Every sole proprietor is self-employed, but not every self-employed person is a sole proprietor. “Self-employment” is the broad umbrella describing the act of working for oneself. A “sole proprietorship” is one specific, unincorporated business structure that a self-employed individual can operate under.

A self-employed individual has the option to choose a different business structure. For instance, they could form a single-member limited liability company (LLC). While the owner of a single-member LLC is still considered self-employed for tax purposes by the IRS, the LLC structure creates a separate legal entity. This separation provides limited liability protection, meaning the owner’s personal assets are generally shielded from business debts. Other self-employed individuals might be partners in a partnership, where they share ownership and profits with others.

Tax Filing for Self-Employed Individuals

For a sole proprietor, all business income and expenses are reported on their personal tax return using IRS Form 1040. The financial activity of the business is detailed on Schedule C, “Profit or Loss from Business.” On this form, the business owner lists their gross income and deducts ordinary and necessary business expenses to arrive at a net profit or loss.

This net profit from Schedule C is used to calculate the self-employment tax on Schedule SE, “Self-Employment Tax.” The resulting self-employment tax amount is then added to the individual’s income tax liability. Because these taxes are not withheld from paychecks, self-employed individuals are generally required to make estimated tax payments to the IRS on a quarterly basis to cover both their income tax and self-employment tax obligations throughout the year.