IRS-wise, what distinguishes someone whose employment is as a day trader versus someone whose investments...?

are day trades? If someone is employed as a day trader, then they have to pay social security, etc., but if their day trades are just considered investments, then they don't. What criteria does the IRS use to make this distinction?

A trader is someone who makes their money buying and selling stock on a daily basis. They can sit at home with their computer and time the market, but it is their primary means of making money.

An investor does not make those same decisions on a daily basis. As an investor, I can decide which stocks to buy and when, but it is not my primary means of business. I let the broker handle my order.

Hope this helps.

Generally, to be engaged in business as a trader in securities, you must meet all of the following conditions:
1. You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
2. Your activity must be substantial, and
3. You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:
1. Typical holding periods for securities bought and sold.
2. The frequency and dollar amount of your trades during the year.
3. The extent to which you pursue the activity to produce income for a livelihood, and
4. The amount of time you devote to the activity.

Significantly more details explaining all of those are on the IRS' web site: Topic 429 - Traders in Securities (Information for Form 1040 Filers)

Read page 72 of publication 550.

A day trader uses schedule C report expenses, but he *doesn't* file schedule SE. A day trader who uses the mark to market election also uses form 4797 instead of schedule D.

The day trader's ability to use investment expenses on a schedule C allows him to claim them even if there are losses and not be subject to the 2% of AGI rule.