What is the difference between self-employed business owners vs. independent contractors?

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Anyone who works but isn’t an employee is self-employed. This includes independent contractors, although not everyone who is self-employed is an independent contractor. The difference depends on their relationship with customers and how they work, rather than the field they work in.
Self-employed business owner looking at business details.

Independent contractors and the self-employed both have the same employment status. They both go into business as themselves, rather than registering their business as a separate legal entity, such as a partnership, limited liability company (LLC), and similar business structures.

This makes the self-employed and independent contractors indistinguishable from their own business. As a self-employed worker any debts, profits, or liabilities against the business affects them directly— both legally and financially. Their business income is the same as their personal income.

As a self-employed worker any debts, profits, or liabilities against the business affects them directly, both legally and financially. Their business income is the same as their personal income. 

They’re also required to pay their own income taxes, including unemployment, Social Security and Medicare taxes.

This is far different than full-time employees, whose employee benefits include having their payroll taxes paid by their employer. The employer also handles employee income tax withholdings.

While the self-employed and independent contractors are similar in many ways, there are a few key factors that distinguish contractors from other self-employed business owners.

What does it mean to be a self-employed business owner?

The term “self-employed” means someone who works for themselves, rather than in an employee-employer relationship. Someone who is self-employed might work as a sole proprietor, an independent contractor, or in a partnership.

They could work on their own, or as the head of their own company with several people working for them. The self-employed engage in a variety of careers, including those in the medical field, consultants, and landscapers.

The Internal Revenue Service says you’re self-employed if:

  • You carry on a trade or business as a sole proprietor or an independent contractor.
  • You are a member of a partnership that carries on a trade or business.
  • You are otherwise in business for yourself (including a part-time business or a gig worker).

What is an independent contractor?

An independent contractor works for other people or companies on a temporary or contracted basis, rather than as an employee. The contractor might be brought on to fill a short-term staffing need, or to work on a project until it’s completed.

A customer might hire an independent contractor to perform graphic design, act as their attorney, provide catering services, or remodel a building.

Are 1099 employees considered self-employed or independent contractors?

While the term “1099 employee,” is often used to describe independent contractors, it would be more accurate to call them “1099 contractors” because they’re not really employees.

According to the IRS, 1099 contractors include independent contractors, subcontractorsfreelancers, and gig workers.

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How is an independent contractor different from a sole proprietor?

One of the key differences between independent contractors and sole proprietors is their relationship with customers. A sole proprietorship typically refers to someone who sells a product, while the term independent contractor is used for those who provide a service.

For example, an artist who makes and sells her own work from a studio is considered a sole proprietor. A graphic artist who works on individual projects for different clients is an independent contractor.

By either definition, independent contractors and sole proprietors are considered self-employed individuals because they’re responsible for finding work, setting their own rates, and paying their own self-employment taxes.

What types of insurance do independent contractors and self-employed business owners need?

The types of business insurance you need as an independent contractor or a self-employed business owner depends on the type of work you do, your business property, what your client base requires, and any professional licensing you may have.

These are some of the most popular policies that independent contractors and self-employed business owners need:


General liability insurance

General liability insurance
is often the first policy pursued by independent contractors and business owners. It covers common business risks such as customer injury, damage to a customer’s property, and advertising injury. It’s often required to qualify for leases and contracts.

Professional liability insurance

Professional liability insurance, also known as errors and omissions insurance, covers the legal costs of client lawsuits over unsatisfactory work. This coverage is often required in professions that require a license, and recommended for work that involves giving professional advice.

Cyber insurance

Cyber liability insurance, also known as cybersecurity insurance, insures against the cost of dealing with a data breach or a malicious software attack. It pays for things like customer notification, credit monitoring, legal fees, and fines. If you work in IT, software development or a related profession, you may need this coverage to protect your bottom line, and to qualify for contracts. 

Fidelity bonds

Fidelity bonds provide reimbursement if an employee commits fraud, theft, or forgery against a client or your business. They’re often required by client contracts in a variety of professions.

Workers' compensation insurance

Worker’s compensation insurance covers medical costs and lost wages for work-related injuries and illnesses. Most states require this policy for any business with one or more employees, and in some riskier professions within the building trades.

Although the law in your state may not require workers’ comp for independent contractors, some businesses may require this coverage for any contractor who works on site. The self employed, independent contractors and sole proprietors may also buy this coverage, even if not required, for the wage protections it offers.

Contractor's tools and equipment insurance

Contractor's tools and equipment insurance covers the cost of repairing or replacing of a contractor’s tools and equipment if they are lost, stolen, or damaged. The items typically must be less than five years old.

Hired and non-owned auto insurance

Hired and non-owned auto insurance provides liability coverage for accidents involving personal, leased, or rented vehicles used by your business. Your personal auto insurance is unlikely to cover you for a work-related accident.

Commercial property insurance

Commercial property insurance pays to repair or replace stolen, lost, or damaged business property. It covers your business’s physical location and other assets like equipment. It’s often required to sign commercial property leases.

Business owner’s policy

A business owner’s policy (BOP) bundles general liability insurance with commercial property insurance. It’s typically less expensive than buying each policy separately.

Commercial auto insurance

Commercial auto insurance is required in most states for businesses that own vehicles. It covers legal bills, medical expenses, and property damage if a business vehicle is involved in an accident.

Whether you consider yourself an independent contractor or a self-employed business owner, you’re responsible for paying your own Federal Income Contribution Act (FICA) taxes.

How do taxes impact contractors and self-employed business owners?

Whether you consider yourself an independent contractor or a self-employed business owner, you’re responsible for paying your own Federal Income Contribution Act (FICA) taxes. This includes Social Security, Medicare, and unemployment taxes on your income.

Independent contractors are required to report income from any customer who paid them more than $600 in a tax year.

You’ll also need to keep track of your tax-deductible business expenses and account for any tax deductions you make when you pay taxes.

For tax purposes, sole proprietors report both their personal and business tax liabilities on their income tax return by attaching a Schedule C, Profit or Loss from Business (Sole Proprietorship) to their Form 1040 or 1040-SR.

Independent contractors should receive a 1099-MISC tax form from each client and report their income on Schedule C of their 1090 form, which is the non-employee equivalent of the standard W-2 form.

Businesses that hire and pay their 1090 contractors directly are unlikely to offer income tax withholding, although some staffing agencies do offer tax withholding for those who perform independent contracting for them. Some agencies also provide temporary health insurance when someone is under contract.

If you sign a 1090 contract with an agency to perform work for another company, and the agency offers income tax withholding, you’ll still have to pay your own taxes and should receive a form 1099-MISC from the agency.

The IRS recommends that small business owners who pay their own taxes should make quarterly tax payments, rather than waiting until the end of the year.

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When do self-employed business owners and independent contractors need licenses?

Whether you need a license to be an independent contractor or a self-employed business owner depends on your type of business, the professional regulations of your industry, and your state and municipal laws.

You might not need a business license if you’re doing business as an individual, in your own name, although you should verify this with your local city or county government to make sure.

You could also check on your state’s licensing requirements through your local secretary of state’s office, your state’s department of revenue, or Cityapplications.com.

Alaska and Washington are the only states that require a license to operate a business, including independent contractors. Even if the law in your state doesn’t require a business license, many municipalities do.

If you sell goods and services to the general public, you may need a sales tax permit that requires you to collect and pay sales and business taxes.

Of course, you might also need a professional license from your state to work in a regulated field such as architecture, cleaning services, construction, engineeringhairstyling, insurance, plumbing, and real estate

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