Self-Employment vs. Independent Contractor: Tax Differences

The terms “self-employed” and “independent contractor” are often used to describe the same type of work, but the Internal Revenue Service (IRS) makes important distinctions between them. This difference has direct consequences for your tax obligations. Understanding the specific meaning of each term is the first step toward navigating your responsibilities and handling your tax affairs accurately.

Defining the Relationship Between the Terms

The terms independent contractor and self-employed are closely related but not interchangeable, as the distinction lies in what each term defines. “Independent contractor” is a worker classification that describes your relationship with a client or company. According to the IRS, you are an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done or how it will be done. This means you control the methods, location, and hours of your work.

“Self-employment,” on the other hand, is a tax status. The IRS considers you self-employed if you are an independent contractor, a business owner, or a freelancer who carries on a trade or business. Being an independent contractor is one of the primary ways an individual becomes classified as self-employed for tax purposes. This status means you are responsible for managing and paying your own taxes directly to the government.

A helpful way to understand this is that all independent contractors are considered self-employed, but not every self-employed person is an independent contractor. For instance, an individual who owns and operates a retail storefront is self-employed but is not working as a contractor. If you provide services to clients who do not control how you perform your work, you are an independent contractor, and this work arrangement makes you self-employed.

Tax Responsibilities of the Self-Employed

Once you are classified as self-employed, you take on two primary tax responsibilities. The first is the self-employment tax, which is the self-employed individual’s version of the Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare. While an employer pays half of these taxes for an employee, a self-employed individual is responsible for paying the full amount.

This tax is calculated on your net earnings from self-employment, not your gross revenue. The tax is calculated on 92.35% of your net earnings, an adjustment that helps to equalize the tax treatment between self-employed individuals and employees. On this adjusted amount, the self-employment tax rate is 15.3%, composed of 12.4% for Social Security and 2.9% for Medicare.

The Social Security tax applies only up to a certain amount of earnings each year ($176,100 for 2025), while the Medicare tax applies to all of your earnings. Higher-income individuals may be subject to an Additional Medicare Tax of 0.9%. This tax applies to self-employment earnings over certain thresholds: $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately.

In addition to self-employment tax, you are also responsible for paying federal and state income tax. Income tax is calculated based on your net business earnings, which is your total business income minus the cost of your business expenses. These deductions lower your taxable income, which reduces both your income tax and self-employment tax. You must file a tax return if your net earnings from self-employment are $400 or more.

Information and Forms for Tax Compliance

Meeting your tax obligations requires diligent record-keeping and understanding several forms. You must track all business income and categorize all deductible business expenses. Common deductions include:

• Costs for a home office
• Vehicle mileage for business travel
• Office supplies
• Software subscriptions
• Marketing or advertising costs

You will provide Form W-9, Request for Taxpayer Identification Number and Certification, to any client who pays you more than $600 in a year. This gives them your information to report payments made to you to the IRS. At the end of the year, you will receive forms from clients or payment processors that report your income, such as Form 1099-NEC or Form 1099-K.

When filing your taxes, you will use Schedule C (Form 1040), Profit or Loss from Business. On this form, you report your gross income and list your expenses to determine your net profit or loss. The net profit from Schedule C is then used on Schedule SE (Form 1040), Self-Employment Tax, to calculate the Social Security and Medicare taxes you owe.

The Process of Paying Taxes

The payment process for self-employed individuals differs from that of traditional employees. Instead of having taxes withheld from each paycheck, you must pay taxes throughout the year in quarterly installments known as estimated taxes. This pay-as-you-go system applies to both your income and self-employment taxes and is required if you expect to owe at least $1,000 in tax for the year.

To determine your quarterly payment amount, you use Form 1040-ES, Estimated Tax for Individuals. This worksheet guides you through estimating your expected adjusted gross income, deductions, and credits for the year to calculate your total estimated tax. You then divide this total by four to determine your quarterly payment amount. The due dates for these payments are typically April 15, June 15, September 15, and January 15 of the following year.

The IRS provides several methods for submitting your estimated tax payments, including:

• IRS Direct Pay from your bank account
• The Electronic Federal Tax Payment System (EFTPS)
• Mailing a check or money order with a Form 1040-ES payment voucher

This process culminates in your annual tax filing. You will attach the completed Schedule C and Schedule SE to your Form 1040 and file the entire package with the IRS by the annual tax deadline, typically April 15. Your quarterly estimated tax payments are then credited against the total tax liability calculated on your Form 1040.