What is the difference between self-employed business owners vs. sole proprietors?

A sole proprietor can be considered a self-employed business owner, but the terms aren’t always interchangeable. They both refer to businesses that provide goods and services to clients and other companies, but not as an employee of those business structures.

By either definition, both self-employed and sole proprietors are responsible for taking care of their own payroll taxes and insurance. For instance, a sole proprietorship would include personal assets in a tax filing for their business, while a separate business entity, such as a limited liability company (LLC), would not.

Self-employed individuals and sole proprietors' personal finances, personal assets, and business assets are inseparable from each other because the sole proprietor is doing business as themselves, often using their personal name with their business name. Many of them also maintain one bank account for both their personal and business uses.

They’re both responsible for paying their own self-employment taxes (Social Security taxes and Medicare taxes).

A self-employed individual is a non-employee who provides services and products to other people and companies. They’re not eligible for workers’ compensation and are responsible for their own income tax withholdings and payments to the Internal Revenue Service.

The field of self-employment can include doctors, lawyers, accountants, hairstylists, and freelancers. It may also include those who are independent contractors.

Every sole proprietor is also considered to be self-employed, although someone who is self-employed might not be a sole proprietor.

A sole proprietor is an individual operating a single-person business. As with self-employed business owners, they’re also not eligible for workers’ compensation and are individually responsible for all of the businesses’ debts, taxes, and legal liabilities.

Sole proprietors include a variety of professions, such as landscapers, therapists, and house cleaners.

Both sole proprietors and self-employed individuals perform their work under their own name, rather than as a corporation, a partnership, or an LLC.

Sole proprietors typically offer their goods and services to a variety of clients on an as-needed basis. Independent contractors perform specific tasks under a contract for a specified period of time.

For tax purposes, they both report their business income on their personal income tax returns using a Schedule C - Form 1040 [PDF].

Many of those who are self-employed receive a tax form 1099-MISC from every customer who pays them more than $400 in a year, and they report this on their personal tax returns.

As a self-employed professional, you typically handle every aspect of your business – from how much you work to when you work.

However, as a small business owner, you generally have others working for you and have to manage them and their work as well.

Self-employed workers and sole proprietors likely need some types of business insurance as liability protection for their businesses, to qualify for contracts, or meet the licensing requirements of their profession.

Because your business and yourself are essentially the same legal entity, any liabilities faced by your business become your own personal liability as well.

General liability insurance is often the first business insurance policy a sole proprietor or self-employed person buys. It covers common business risks, such as customer injury, damage to a customer’s property, and advertising injury.

This comes in handy for those who have visitors to their business, such as doctors and beauty salons. It also benefits those who visit a customer's property, such as landscapers and house cleaners.

A general liability policy may be required to sign a commercial lease, and to qualify for contracts.

Professional liability insurance, which is also referred to as errors & omissions insurance (E&O), covers the cost of client lawsuits over unsatisfactory work, such as missing a deadline or making a mistake that causes financial or physical harm.

You may need this type of liability coverage to protect you from a financial loss, to qualify for contracts, or meet your state’s licensing requirements for your profession.

For example, the federal government often requires this coverage to work on federal contracts. Some states require real estate professionals, insurance agents, and others to have professional liability or E&O insurance. Healthcare professionals may be also be asked to carry this type of coverage, which is often referred to in their field as malpractice insurance.

Contractor’s tools and equipment insurance covers the repair or replacement of your tools and equipment if they’re lost, stolen, or damaged.

A form of inland marine insurance, contractor's tools and equipment coverage is often purchased by general contractors and other construction and contracting professionals. The items must typically be less than five years old to qualify for this coverage.

Workers’ compensation insurance covers the medical costs and lost wages related to workplace injuries and illnesses among employees. Most states require employers to carry this coverage if they have one or more employees, although it may also be required for contractors and subcontractors in riskier professions, such as the building trades, regardless of whether they have employees.

Even when not required, many contractors and the self-employed buy workers’ comp for themselves, in case they’re injured on the job. Your regular health insurance is unlikely to cover you for a work-related injury, whereas workers’ comp can help with your medical bills and some of your lost income.

Commercial property insurance may be required if you have a commercial lease for your business. It covers your business’s physical location and other assets, such as equipment and inventories.

A business owner’s policy (BOP) combines your general liability and your commercial property coverage into one policy. It usually costs less than buying each of these policies separately. Only small, low-risk businesses may be eligible for a BOP.

Cyber insurance, also known as cyber liability insurance and cybersecurity insurance, is typically a must-have for anyone in the IT sector, or those who are responsible for handling or protecting sensitive information.

It covers the cost of data breaches and cyberattacks against your own business, such as notifying customers, credit monitoring, legal fees, and fines. It also covers customer claims and lawsuits, if a client accuses you of failing to protect them from a data breach.

Fidelity bonds, a type of surety bond, are often required by client contracts in a variety of professions, such as financial planning, cleaning professionals, and consultants. A fidelity bond reimburses a customer if one of your employees commits fraud, theft, or forgery against them.

Commercial auto insurance and hired and non-owned auto (HNOA) are two types of business vehicle insurance.

Commercial auto coverage is required by most states for business-owned vehicles. It covers your legal bills, medical expenses, and property damage if your business-owned vehicle is in an accident.

HNOA covers any personal, leased, or rented vehicles used by your business. Your personal auto insurance is unlikely to cover you for work-related accidents.

Sole proprietors and the self-employed are responsible for paying all their state and federal taxes themselves, rather than an employer handling this through paycheck withholdings and paying taxes on behalf of an employee.

The IRS recommends that sole proprietors and the self-employed pay their estimated taxes on a quarterly basis, based on their projected total income for the tax year.

Failure to do so can result in penalties. You might even be charged a penalty if your quarterly payments are late or you wait until the end of the year to make them, even if you receive an income tax refund based on your annual income tax return.

Because sole proprietors and the self-employed are both unincorporated businesses, their business expenses and tax deductions both apply to their personal tax liability when they file taxes.

Both sole proprietors and the self-employed typically use their own Social Security numbers when filing their taxes, rather than obtaining an Employer Identification Number (EIN) from the IRS.

EINs are required for sole proprietors who file excise tax returns or establish a pension, profit-sharing, or retirement plan. They’re also required to form an LLC.

For more information on self-employment, independent contracting, and taxes check out the  IRS webpage: Frequently Asked Questions page for small businesses and the self-employed.

You may need business license if you’re self-employed or a sole proprietor, though it depends on where you live and your profession.

Most states don’t require a license for sole proprietors, except for Alaska and Washington state.

If you don’t need a state license, you may need one from your local county or city government. You may be required to obtain a general business license, a business tax certificate, or a tax registration certificate.

To find out if a license is required in your area, you could check with your county or city clerk’s office, or your local chamber of commerce. Local zoning laws might restrict the type of business you could run out of your home, so it’s important to verify this as well.

You can also check your state’s licensing requirements through your local secretary of state’s office, your state’s department of revenue, or CityApplications.com. Your business might also need a sales tax permit if you sell goods and services to the public.

In addition to a business license, you might also need a professional license from your state or local government.

Those who work in the construction industry will probably need a license, based on the type of work they do, the cost of the projects they work on, and where they work. Licenses are also typically required for general contractors, landscaping, HVAC contractors, electricians, and plumbers.

Other professions that typically require a state or local license include cleaning services, insurance, and hairstyling, to name a few.

For any work that is federally regulated, you may need a license from the appropriate federal agency. This could include agriculture, alcoholic beverages, or transportation. You can check with the U.S. Small Business Administration (SBA) for on federal licensing for small business owners.

At Insureon, we specialize in finding the right insurance for small business owners, including sole proprietors and the self-employed.

Complete Insureon’s easy online application today to compare insurance quotes from top-rated U.S. carriers. You can also consult with an insurance agent on your business insurance needs. Once you find the right policies for your small business, you can begin coverage in less than 24 hours.