Self-employed: Definition and examples
A self-employed person is an individual who works for themselves in their own business as opposed to working as an employee in someone else’s enterprise. There are some slight variations in the definition, such as for tax or legal purposes. It is possible to be both employed and self-employed as the difference between being employed and self-employed can be quite complex.
Some people choose self-employment because they want to be their own boss.
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According to Merriam-Webster, to be self-employed is to earn “income directly from one’s own business, trade, or profession rather than as a specified salary or wages from an employer.”
At the heart of the definition is the sense of being one’s own boss. Employing oneself means being responsible for the success or failure of the business. It also means owning the risk of making a loss or a profit.
Working for oneself and earning an income as an employee are not necessarily mutually exclusive. A person can have a job working for an employer and also be self-employed in their own business.
People become self-employed for a variety of reasons. For some, it can be the desire for autonomy. For others, it might be necessary just to survive. Economic context plays a role. Countries also vary in the extent to which they encourage and support entrepreneurship.
This article outlines two definitions of self-employed. The first is from the Organization for Economic Cooperation and Development (OECD) and takes an economic view. The second definition is from the United Kingdom government who use it for tax purposes.
Self-employed: OECD definition
To define self-employment, it is necessary first to define employment. The International Labour Office (ILO) has formulated a definition that is widely used.
“Persons in employment,” note the ILO, “are defined as all those of working age who, during a short reference period, were engaged in any activity to produce goods or provide services for pay or profit.”
Many countries use the ILO definition when compiling statistics and formulating policy. This means that they count those who work 1 hour or more per week as employed.
The OECD also use the ILO definition of employment. They base their definition of self-employment on it. According to the OECD, there are four types of self-employed workers:
- Those who work for themselves
- Employers, that is the owners, who also work in the business
- Members of marketing co-operatives
- Unpaid family members who work in the family business
The reason for including unpaid family members is because they do not have formal employment contracts entitling them to receive a wage. Instead, they share in the income that the family enterprise generates. The OECD point out that this group is “particularly important in farming and retail” enterprises.
However, as a result of this inclusion, together with the ILO definition of employment, the OECD’s self-employment rates can be very high in countries with many small farms and no formal employment contracts.
OECD rates of self-employment
According to an OECD 2020 report, the countries with the highest self-employment rates are:
- Colombia (50.1% of total employment)
- Brazil (32.5%)
- Mexico (31.9%)
- Greece (31.9%)
- Turkey (31.5%)
In contrast, those with the lowest rates of self-employment are:
- United States (6.1% of total employment)
- Norway (6.5%)
- Russia (6.7%)
- Canada (8.2%)
- Denmark (8.3%)
The following chart shows all the countries covered by the report. The figures reflect how “[s]elf-employment may be seen either as a survival strategy for those who cannot find any other means of earning an income or as evidence of entrepreneurial spirit and a desire to be one’s own boss.”
Self-employed: UK government definition
Governments take an interest in whether individuals are employed or self-employed because it can affect how they pay tax. In the UK, as in many other countries, employees pay income tax through a pay as you earn (PAYE) system.
PAYE systems deduct income tax from employees’ pay before they receive it. In contrast, self-employed people pay tax on their profits, not their earnings.
The difference between those who are self-employed and those who are employees and receive their pay through PAYE is not clear cut. The UK government state that a worker is likely to be self-employed and should not receive income through PAYE if most of the following statements apply to them:
- They can work for more than one customer
- Their payments follow fixed price terms and do not depend on how long the work takes
- They decide how they work, what the work is, and when and where they do it
- Responsibility for the success or failure of the enterprise rests with them
- Putting right unsatisfactory work is their responsibility and they do it in their own time
- The costs of the business come out of their own pockets: e.g. purchase of tools, equipment, and other assets
- They can hire others to do the work that they take on