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Self-Employment Basics

A self-employed person works for himself/herself instead of as an employee of another person or organization, drawing income from a trade or business. This is less stable than working as an employee but tends to earn a higher hourly income or rate. In some cases, a self-employed person may find that s/he cannot keep up with clients' needs alone, and may hire others, thereby forming a small business. 

In its simplest form, the individual and his business are one and the same entity. This makes the owner personally liable for all the debts of the business. To avoid this, he may choose to incorporate his business, protecting his personal assets from creditors or others taking legal action against the business.

Self-Employment and Retirement Savings
Self-employed workers cannot contribute to a 401K plan, unless they self-incorporate and set up a 401K plan for the company, but this requires some significant paperwork. Most self employed set up a Self Employment Plan (SEP) IRA, which allows them to contribute up to 20% of their income, up to $40,000 in contributions, to the SEP per year. This is significantly higher than 401K plans.

If a self-employed person's client goes bankrupt, the bankrupt company's actual employees usually have first rights to whatever cash the company had. Next is the IRS, and then all the external creditors, including the self employed worker.

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