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Self-employment is the act of generating one's income directly from a consumer as opposed to being an employee of a business (or person).
Generally tax authorities will view a person as self-employed if the person (1) chooses to be recognized as such, or (2) is generating income such that the person is required to file a tax return under legislation that subsists in the relevant jurisdiction(s). In the real world the critical issue for the taxing authorities is not is the person trading but is the person profitable (and hence potentially taxable.) In other words the activity of trading is likely to be ignored if no profit is present. So, occasional and hobby- or enthusiast-based economic activity is generally ignored by authorities.
In some countries governments (the US and UK, for example) are placing more emphasis on clarifying whether an individual is self-employed or engaged in disguised employment, often described as the pretense of a contractual intra-business relationship to hide what is otherwise a simple employer-employee relationship.
Self-employment in the United States 
In the United States, any person is considered self-employed for tax purposes if that person is running a business as a sole proprietorship, independent contractor, as a member of a partnership, or as a member of a limited liability company that does not elect to be treated as a corporation. In addition to income taxes, these individuals must pay Social Security and Medicare taxes in the form of a SECA (Self-Employment Contributions Act) tax.
U.S. Taxation 
The self-employment tax in the United States is typically set at 15.30% which is roughly the equivalent of the combined contributions of the employee and employer under the FICA tax. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. The social security portion of the self-employment tax only applies to the first $110,100 of income for the 2012 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax.
Generally, only 92.35% of the self-employment income is taxable at the above rates. Additionally, half of the self-employment tax, i.e., the employer-equivalent portion, is allowed as a deduction against income.
The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011, for a total of 13.3%. This rate will continue for income earned in calendar year 2012, due to the Temporary Payroll Tax Cut Continuation Act of 2011.
Self-employed persons sometimes declare more deductions than an ordinary employee. Travel, uniforms, computer equipment, cell phones, etc., can be deducted as legitimate business expenses.
Self-employed persons report their business income or loss on Schedule C of IRS Form 1040 and calculate the self-employment tax on Schedule SE of IRS Form 1040. Estimated taxes must be paid quarterly using form 1040-ES if estimated tax liability exceeds $1,000.
401k retirement account 
Self-employed workers cannot contribute to a company-run 401k plan of the type with which most people are familiar. However, there are various vehicles available to self-employed individuals to save for retirement. Many set up a Simplified Employee Pension Plan (SEP) IRA, which allows them to contribute up to 25% of their income, up to $51,000 (2013) per year. There is also a vehicle called the Self-Employed 401k (or SE 401k) for self-employed people. The contribution limits vary slightly depending on how your business is organized but are generally higher than the other types of plans.
Effects on income growth 
Research has shown that levels of self-employment in the United States are increasing, and that under certain circumstances this can have positive effects on per capita income and job creation. A 2011 study from the Federal Reserve Bank of Atlanta and Pennsylvania State University looked at U.S. self-employment levels from 1970 to 2000. According to data from the U.S. Bureau of Economic Analysis, the absolute number of people registered as non-farm proprietors (NFPs) or self-employed in metropolitan counties grew by 244% between 1969 and 2006, and by 93% in non-metropolitan counties. In relative terms, the share of self-employed within the labor force grew from 14% in 1969 to 21% in 2006 in metropolitan counties, and from 11% to 19% in non-metropolitan counties.
In non-metropolitan counties, the study found that increased levels of self-employment were associated with strong increases in per capita income and job creation and significant reductions in family poverty levels. In 1969, the average income of non-farm proprietors was $6,758 compared to $6,507 earned by salaried employees; by 2006 the difference in earnings widened to $12,041 in favor of salaried employees. The study notes that the gap could be due to underreporting of income by the self-employed. Alternatively, low-productivity workers could be losing their jobs and are forced to be self-employed. Further, some research shows that higher local unemployment rates lead workers to self-select into self-employment, as does past unemployment experience.
Self-employment in the United Kingdom 
A self-employed person in the United Kingdom can operate as a sole trader or as a partner in a partnership (including a Limited Liability Partnership or "LLP") but not through an incorporated limited (or unlimited) liability company. It is also possible for someone to form a business that is run only part-time or concurrently while holding down a full-time job. This form of employment, while popular, does come with several legal responsibilities. When working from home clearance may sometimes be required from the local authority to use part of the home as business premises. Should the business hold records of customers or suppliers in any electronic form it is required to register with the Information Commissioner's Office. Other legal responsibilities include statutory public liability insurance cover, modifying premises to be disabled-friendly, and the proper recording and accounting of financial transactions. Free advice on the range of responsibilities is available from government operated Business Link centres.
UK Taxation 
A self-employed person may be subject to more taxes than an average employee. In addition to both the employee and employer National Insurance contributions, there may be VAT, business rates and other taxes payable to central and local governments.
See also 
- "Self-employment and Local Economic Performance: Evidence from U.S. Counties". JournalistsResource.org, retrieved June 19, 2012
- Rupasingha, A.; Goetz, S. J. (2011). "Self-employment and local economic performance: Evidence from US counties*". Papers in Regional Science: no. doi:10.1111/j.1435-5957.2011.00396.x.
- Federal Reserve Bank of Chicago, Self-Employment as an Alternative to Unemployment, December 2003
- Boylan, A. and Burchardt, T. (2002) Barriers to self-employment for disabled people, Report for the Small Business Service, available at http://www.berr.gov.uk/files/file38357.pdf, last accessed January 2010