Self-Employed Vs Freelance Taxes: All You Need to Know

Taxes are trickier when you’re not an employee — let’s figure this out together! In this article, you’ll learn the differences between self-employed and freelance workers and see how taxes and benefits work for both of these employment statuses.

Self-employed vs freelancer: what’s the difference?

“Self-employed” and “freelancer” are the words often used interchangeably — and they are the same but also not quite. Let’s draw the line then!

A freelancer is a person who is not a common-law employee and works on a project basis delivering products or services to their clients. For example, Olga is a freelance wedding photographer who shoots a couple weddings a month tops as a side hustle and gets her remuneration via electronic invoices. It’s not her main occupation, she doesn’t work for a particular wedding agency, and she’s mostly working with friends’ friends.

A self-employed worker is also not a common-law employee — but they run their own business or get hired as a contractor by a certain company. For example, Olga’s side hustle started bringing the revenue large enough to quit a job, and she ended up opening a small agency, hiring other photographers and a social media marketer, and so on. In this case, she’s self-employed. 

Now, let’s imagine that Olga’s business failed, and she became a photographer in a large event management agency that hires independent contractors to create photos and videos for clients. She’s not a business owner anymore and not a freelancer either — but still self-employed.

Self-employed as a legal status

We discussed self-employed as an occupation format — but the term also has a legal meaning, the one that has a lot to do with taxes. Let’s dig deeper.

A self-employed person is someone who runs their business for themselves and is responsible for its success or failure. That means, they’re not protected by some of the worker rights legislations — for example, they can’t get a paid sick, a maternity leave, or a severance package once they stop working with someone. 

The definition implies that all freelancers are self-employed legally — although not all self-employed people are necessarily freelancers.

How taxes work for self-employed people

When you sign a common-law contract with an employer, you don’t have to bother about taxes — the employer deducts them from your salary for you. But when you’re a freelancer (so, legally self-employed), you have clients, not employers — you are your own employer, hence the name. That means, self-employed people pay taxes themselves.

Self-employment as a legal status and a separate taxation mode exists in many countries. However, the laws are different everywhere — so, how much you’d have to pay and the exact tax payment procedure depends on where you live. At the same time, there are some similarities.

If we try writing about everything at once, you won’t have enough patience to finish reading this War and Peace of an article. So, we chose to describe two examples of self-employment tax systems just for you to get the general gist of how it works.

Self-employed taxes in the United States

Tax rate. The self-employment tax rate is 15.3%, both for social security and Medicare — 12.4 and 2.9% accordingly. The taxable part of your income is 92.35% of your net earnings as a self-employed person. You don’t have to claim self-employed income if it doesn’t exceed $400.

Additional rates. If you as a single person earned more than $200,000 (including self-employed income), you’ll have to pay an additional 0.9% of Medicare tax.

How to pay. File the Form 1040-ES once in a quarter. The IRS website offers several payment methods, feel free to choose between debit card, direct bank account payments, and so on. If you’re working not just for a person but for a business, you might have to deal with other forms. We delved into the issue in our definitive expert knowledge-powered guide about W-9 vs 1099 forms — check out our blog!

Self-employment taxes in the United Kingdom

Tax rate. The exact tax rates depend on how much you earned as a self-employed person. The UK also has a cool thing called “personal allowance” — if your self-employed income is £12,570 or below, it’s “your” money and it’s not taxable. For self-employed earnings between £12,571 and £50,270, prepare to pay the “basic” self-employment tax rate of 20%. If you earn between £50,271 and £125,140, your rate increases to a whopping 40%. And if you exceed that, you’re liable to the highest tax rate of 45%.

Note: the numbers above are not applicable to Scotland — check out Scottish tax brackets separately.

How to pay. Weekly or monthly, as long as you fit in the deadlines. Choose between several payment methods, including online banking. There is also an official HRMC mobile app where you can get all the intel on your taxes.

Are self-employed people entitled to tax deductions?

A tax deduction is a benefit mostly associated with common-law employees — however, it depends on the country. In some countries, self-employed people can’t use tax deductions in any circumstances, others impose limits. Let’s use the same two examples and explore the possibilities.

The United States. Surprisingly, there’s plenty of tax deductions available to self-employed Americans. One of the most common is reducing your income tax (yep, it’s not the same as the self-employment task) — you can deduct the “employer portion” from your income and pay the smaller income tax because it’s calculated from a smaller number. Other options include work-related health insurance tax deduction, travel expenses (excluding “lavish and extravagant meals”), professional education, advertising, and so on.

The United Kingdom. In the UK, you can write off a portion of your self-employed income as expenses, which means paying a smaller tax. It’s even available for those working from home — you can claim a portion of heat, rent, electricity, and other payments as business expenses. So, despite a very high self-employment tax rate compared to other countries, you can pay a lot less if you know your rights.

Wrapping up

That was a lot of new information! Now, let’s revise some of it so you don’t forget everything the second you close the browser tab:

• A freelancer is anyone who works on a project basis with multiple clients. Meanwhile, a self-employed person is anyone who runs their business for themselves — but not necessarily a freelancer. Self-employment includes business owners or just non-common-law employees working for an agency or a company.
• Legally, self-employment implies that there’s no employer to pay taxes for you — so you do it yourself.
• Many countries have the self-employment legal status and a separate taxation mode for such people. We used the examples of the US and the UK to show how it works.
• Based on these examples, you can see that the self-employed tax rate is a portion of your income, and the size of it may depend on how much you earn. It’s paid regularly, the schedule depends on the country.
• If you’re self-employed, you’re still entitled to tax deductions on certain conditions — for example, in the UK you can write a lot of things off as business expenses, including rent if you work from home.

FAQ

What are the drawbacks of being self-employed?

Self-employment implies a less stable financial situation, less benefits (for example, no paid vacations, sick days, or maternity leaves), in some countries the status means you’re not entitled to pension — there’s a solid number of disadvantages! Also, you’ll have to pay your own tax since the employer doesn’t do it for you. 

Is there a legal difference between self-employed and freelancers?

There is no legal difference between self-employed people and freelancers — both are legally self-employed and have to pay self-employment taxes. However, not all self-employed people are freelancers: they might be small business owners or full-time team members not hired by common law.

Why is the self-employment tax in the US so high?

The self-employment tax in the US is basically the sum of the employer and the employee parts of what they should pay for social security and Medicare — that’s why it’s so large. However, self-employed workers can pay smaller income taxes thanks to tax deduction.

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