“Self-employed" and “business owner" are terms often used interchangeably. But are they really the same things? The answer is no.
When you're self-employed, you're not always a business owner. You may simply have created your own job. While it sounds confusing, each becomes clear when you understand what the terms mean.
What constitutes being self-employed?
“The difference between being self-employed and being a business owner basically boils down to whether you are working for someone else or someone else is working for you," says Patrick Burke, managing partner of the tax and business consulting firm Burke & Schindler PLL and author of The 10 Biggest Business Mistakes and How to Avoid Them. “If you are strictly working for yourself, providing services to another person or company, you are self-employed."
Kathleen Overfield-Zook, assistant director of the Gilliam Center for Entrepreneurship at James Madison University, worked as a freelance musician and instructor for 25 years. “During this time, I considered myself self-employed," she says. “I worked on my own terms. If I wanted to expand my teaching schedule, I announced I was taking on more students and added them to my workload. If I wanted to play a certain concert—or more specifically, didn't want to play a concert—I'd say yes or no."
Overfield-Zook didn't have a business name. She was paid directly, and her income went directly into her personal bank account. “This combination of freelance work, where I was not paid full time by any one company or business, was how I made my living," she says.
Being self-employed means having complete control. However, you are limited in how many different directions the company may take by how much time you have.
What is business ownership?
If you have others that are working on your behalf, you have started a business, Burke says. “A business can be scaled by adding new employees, new products, and new services," he says.
Overfield-Zook shifted from self-employed to business owner when she founded The Bloom Trio and Event Musicians LLC. “We formed in 2012 and quickly became one of the most in-demand string ensembles in the Shenandoah and central areas of Virginia for weddings and other special events," she says. “With little to no background in business development, we learned as we went. I eventually formed an LLC with a separate bank account. I also started sending 1099s to the other musicians I hired to perform with us."
Being a business owner means managing others. For many, this is the hardest leap to take because you give up some control and move from creator to manager.
Self-employed vs. business owner
Brad Touesnard, CEO of the tech company SpinupWP, says the difference is how you earn.
He quotes Rich Dad Poor Dad author Robert Kiyosaki as saying that self-employed people earn from their own work, but business owners earn from a system they created. “For example," Touesnard says, “if you are a graphic designer, you get paid for the designs you personally create. This makes you self-employed. However, if you run a graphic design agency, you have a system that generates revenue from graphic design work. You are not personally creating every piece of design that your agency produces, and you will typically have employees who will be doing the actual design work."
Another way to understand the difference is to ask yourself what would happen if you took a vacation. “If you're self-employed, you will no longer be working and your income will dry up," Touesnard says. “If you're a business owner, the system you created will continue generating income without you."
You can also look at how you file your taxes, Overfield-Zook adds. “As a self-employed person, my finances were linked," she explains. “With my business, I pay myself and others from a distinct account. Even when I play on my own for a Bloom Trio event, checks are made to the business, and I pay myself from there. When I file taxes, Bloom Trio expenses go onto their own form as opposed to before, when I was self-employed, and all my business expenses went onto a schedule C."
Whether you're self-employed or a business owner, you're a risk-taker, says Helen Yu, author of Ascend Your Start-up: Conquer the 5 Disconnects to Accelerate Growth. “Both the self-employed and the business owner must figure out accounting, marketing, operations, customer experience, sales, and so much more," she says. “Either way, you've found the courage to strike your own path."
Find out more about Starting a Business