Self-Employed Income vs. Wage: Understanding What You Earn

As a self-employed person, the line between wage and income can be blurry, but it's important to understand the key differences to accurately manage your financials and remain compliant with tax regulations. In this article, we will explore the distinctions between wage and income, and help you determine which category your earnings fall into.

What is Wage?

The term wage is commonly used to describe the salary or compensation that an employee receives from an employer. It is a regular payment of money for the services rendered, usually specified in a contract or agreement and paid on a predetermined schedule, such as weekly, biweekly, or monthly.

What is Income?

Income, on the other hand, is broadly defined as any money, assets, or property that is received in exchange for providing goods or services. For self-employed individuals, income encompasses the money that comes from the operation of their business. This could be from the sale of products, provision of services, or any other revenue-generating activities.

The Difference Between Wage and Income

For a self-employed individual, the income earned is more complex than a regular wage. The key differences lie in the regularity and source of the payment:

Wage

Paid regularly by an employer Part of a formal employment relationship Often subject to specific payment dates and times May include tax deductions and benefits

Income

Generated from the sale of goods or services May be irregular and self-determined Does not come from an employer; rather, it is income from a business Includes revenues that are declared in annual tax returns

When Does Income Become a Wage?

While most self-employed individuals draw income from their business on a discretionary basis, it is possible to regularly pay yourself from your company, which would then be considered as a wage or salary. To determine whether your payments are a wage or income, consider the following:

If You Regularly Pay Yourself:

Employer-employee relationship: If you regularly pay yourself from a formal company or business, it is likely to be considered a wage or salary. This payment would be regular and consistent, requiring an employment agreement or contract. Employee benefits: Paying yourself consistently may also include benefits, such as insurance, retirement plans, and other perks. Tax implications: Regular payments may be subject to payroll taxes, unemployment taxes, and other benefits provided by the employer.

If You Draw Payments as You Go:

Self-determined payments: If you draw money from the revenue generated by your business on an as-needed basis, this would be considered personal income. It is not a regular wage but rather a draw from the business's revenue. Tax reporting: As you declare the income generated by your business in your annual tax returns, these payments would be included in your income for tax purposes.

Conclusion

Understanding the differences between wage and income is crucial for self-employed individuals. Regular payments from a formal employment relationship are considered a wage, while income is generated from the operation of a business. By accurately categorizing your earnings and reporting them correctly, you can ensure compliance with tax regulations and maintain a healthy financial management system.

Key Takeaways

Wage: Regular payment from an employer, typically subject to payroll taxes and benefits. Income: Earnings from the operation of a business, declared in annual tax returns. Regular payments to yourself from a business can be considered a wage if you have a formal employment relationship. Irregular payments based on business revenue are considered personal income.

By understanding these concepts, you can better manage your finances and ensure compliance with tax laws as a self-employed individual.