Editor's note: Self-employment means
independence and being your own boss. As with all things however,
self-employment is not perfect and there are offsetting costs to being your
own boss.
Before making the
jump to self-employment, know the full costs of working for yourself,
including the financial costs. Self-employment can be the road to
riches, but unless you are prepared for the flipside, you can be caught
unaware. Kenny Herbold explores many of the costs of being
self-employed.
The True Cost of
Self-Employment
by: Kenny Herbold
Do you think you are ready to make that leap to
full self-employment? The profit from your part-time (up till now :-) business
is matching or exceeding your regular paycheck, so you think it’s time to fire
your boss and make do without that paycheck. Before you take that final step to
personal freedom, make sure you truly understand what you are giving up. Your
employer paid benefits may cost you more than you realize. For many people it
will take more than $40,000 of profit per year to replace a $40,000 annual
salary.
When I talk about your employer paid benefits
I’m not referring to the “free” office supplies, subsidized soft drinks,
or even the occasional free meal at the holiday party. The items that you need
to consider are the benefits that are going to cost you the most money. Although
if you really like soda I guess you might want to include this too! According to
a survey published by the US Chamber of Commerce in January 2004, employer paid
benefits averaged 42% of an employees salary in 2002. That means you need an
additional 35 – 45% more than your current salary to make up for these lost
benefits.
If this number shocks you, then let’s take a
look at some of the typical benefits employers provide. Again, based on the US
Chamber of Commerce's survey medical insurance cost approximately 15% of an
employee's salary. However, employers also cover the cost of many other forms of
insurance. They include
- Disability,
- Dental,
- Vision,
- Life,
- Unemployment,
- Long Term Care Insurance, and
- Workers Compensation
You might be thinking that you pay premiums for
these products already. Even if you do, your employer is most likely paying the
lion’s share of the cost. Not to mention that many times the premiums you are
paying are using pre-tax dollars. This means you end up paying less in taxes
because the amount of your premium is deducted prior to calculating your taxable
income.
When you own a home-based not only are are you
going to be responsible for the full cost of all forms of insurance using
after-tax dollars, you are going to be responsible for self-employment taxes.
Self-employment taxes include the employer paid portion of Social Security and
Medicare taxes. This means your bill for these taxes are going to double.
Instead of paying 7.65% of your income for these, you will now pay 15.30%. And
don’t forget about having to pay estimated taxes. You will have to file and
pay taxes 4 times a year now, instead of just once. Not only do your taxes
increase so do the headaches and the cost of filing!
The second highest benefit cost is your
retirement benefits. Your employer’s 401(k) match guarantees an immediate
return of up to 100% on your money, depending on how much your company will
match and how much you contribute. If your company has a defined benefit pension
plan, you are losing a guaranteed income in retirement. You are also taking on
the additional risk because you are 100% responsible for investing the money to
replace it.
These are only a few of the largest items that
make up the 30 – 40% of your salary that will become your responsibility when
you become self-employed. Your company might be paying for many other perks
also. Some other things you might want to consider are
- company car (this includes gas and
maintenance)
- annual or performance bonuses
- professional training or expenses (including
professional journal or society dues)
- software license that let you use programs
like Microsoft Office programs on your home computer
- vacation pay (that’s right, you no longer
get paid when you take days off)
All of these, and any others you might be able
to think of will needed to be included in the total cost of becoming
self-employed.
I hope you don’t think I’m trying to
discourage you from finally being able to become your own boss. I just know that
the excitement of finally making this move can make us forget about some of the
“extras” we are receiving. You are considering a very serious change and
need to make sure that the benefits are going to outweigh ALL of the costs.
About The Author
Michael Nigohosian is the author of the
award-winning and bestselling series, "The Secret Path to Contract
Programming Riches" and instructor for the course "Introduction to
Contract Programming". He is also director of Rapid Mastery Technology™
at McGillis, Wilcox, Webster & Co., Inc.™ http://www.mwwcorp.com
