Self-Employment

Related Terms: Self-Employment Contributions Act (SECA); Small Business

Self-employment has always been a fundamental feature of American life, not just in colonial times and during early U.S. history—during which, of course, the predominant form of work was agriculture—but also in the most recent period of modern times since World War II. Data on self-employment are collected by the U.S. Bureau of Labor Statistics (BLS) as part of the Current Population Survey. The most recent such data are for the year 2003. In the period 1948 through 2003, those self-employed in non-agricultural industries have represented around 7 percent of total employment. The highest levels came in the early decades of this period, with 1948 being the highest year: 12 percent of all those working outside agriculture were working for themselves. The lowest level was reached in 2002 (6.7 percent), and, generally the trend has been downward. In 2003, 9.3 million individuals were self-employed and represented 6.9 percent of non-agricultural employment. Self-employment rates fluctuate up and down. They tend to rise during reces-sions—but sometimes also rise with the rising economy. Self-employment is highest in the agricultural sector where, in 1948, 61.1 percent of all workers were self-employed. In 2003, 951,000 agricultural workers, 41.8 percent of all those engaged in agriculture, worked for themselves.

LEGAL DEFINITIONS

Individuals who choose self-employment must be aware of the rules governing the treatment of free-lance employees (also known as independent contractors). Classification of someone as an employee or a self-employee is somewhat ambiguous and depends on several factors, including the degree of independence, the freedom to hire others to do the work taken on, the freedom to work for others, and the assumption of risks. Independent contractors typically accept no fringe benefits and pay Social Security, Medicare, and income tax installments directly. Employees have more statutory rights, benefits, and protections than subcontractors, who must generally provide these for themselves. But independent contractors have advantages in terms of freedom, flexibility, and tax deductions.

The IRS applies a 20-part test in order to determine whether a certain worker should be classified as an employee or an independent contractor. The main issue underpinning the test is who sets the work rules: employees must follow rules set by their bosses, while independent contractors set their own rules. For example, an individual who sets his own hours, receives payment by the job, and divides his time between work for several different employers would probably be classified as an independent contractor. Other criteria involve who provides the tools and materials needed to complete the work. For example, an individual who works at an employer's facility and uses the employer's equipment would be considered an employee, while one who works at a separate location and provides her own equipment would be classified as an independent contractor. Finally, an independent contractor usually pays his own expenses of doing business and takes the risk of not receiving payment when work is not completed in accordance with a contract, while an employee is usually reimbursed for business-related expenses by the employer and receives a paycheck whether his work is completed or not.

An individual's status as a self-employed, independent contractor can be reinforced by having multiple clients, being paid by the amount of work done rather than by the hour, or obtaining an employer identification number from the IRS. Working under a business name also helps reinforce this status. Printing invoices, business cards, and stationery can also help identify someone as a self-employed person. In general, the person must demonstrate that he or she is in business for the purpose of making a profit.

CHARACTERISTICS

Of those self-employed in industry (versus agriculture), slightly over half (51.5 percent) were working as incorporated entities. The self-employed are predominantly older. Among those unincorporated, those aged 24-44 represented 42 percent and those aged 44 and older 54.5 percent of this segment of the self-employed. Among those incorporated, the older were even more numerous, representing 58.5 percent of those over 44 and 42 percent of those in the 24-44 bracket. In the wages and salary-earning population as a whole the 24-44 group was 48.1 percent and those over 44 were 36.5 percent. The self-employed are overwhelmingly white (88.2 percent of unincorporated, 90.1 percent of those incorporated) and U.S. born (87 percent in both categories). The educational attainment of the incorporated self-employed was high in 2003. Of these individuals, on average, 72 percent had some college on up to advanced degrees; among the unincorporated 58 percent had such attainment, slightly below the wages and salary-earning population, of which 60 percent had some college or higher attainment. Males are more present in both categories, representing 62 percent of the unincorporated and 73 percent of the incorporated self-employed.

Beyond such demographic measurements, the motivation for self-employment is more difficult to determine. Motivations routinely mentioned by commentators no doubt rest on experience and observation—namely that some women choose self-employment to be more available to care for a member of the household. Some of the elderly continue working on their own as they reach retirement age—and beyond. A certain segment of the self-employed population is motivated by enterprise. Many, however, do not choose this type of work but do it as a way of coping with inability to find good jobs, especially in middle age. And of these some succeed well enough to found organizations and thus, after a period, migrate back into employment—but in companies that they now own. Fluctuations in self-employment data may in part be explained as an indirect effect of new business formation: these begin as single-person businesses but then become providers of wages and salaries—for the owners as for others.

SELF-EMPLOYMENT AND THE VERY SMALL BUSINESS

Elsewhere in this volume (see Small Business) are presented data on the so-called nonemployer businesses, labeled "the micros." In 2003, there were some 18.6 million such businesses grossing $830 billion in revenues, equivalent to $44,623 per entity. This number was twice as high as the 9.3 million self-employed persons in 2003—but also includes them. The self-employed, thus, are roughly half of the population of "micro" of business, the seedlings from which larger entities often emerge. But obviously many nonemployer businesses are also operated "on the side" by people employed in ordinary jobs but doing some trading, producing, and service providing in their spare time: moonlighting, in other words. In 2001, 7.8 million people reported working at multiple jobs. Of these, 4.6 percent (359,000) told the BLS that they were doing this in order to build a business or to get experience—preparing, perhaps, to launch their own operations. Nonemployer businesses grew by 20.8 percent between 1997 and 2003; during the same period, total employment increased 7.3 percent and self-employment by 3.1 percent, losing share, in other words. Thus it is plain that the growth of seedling businesses is far less attributable to self-employment than to entrepreneurial activity.

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