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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 itís 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 Iím not referring to the ďfreeĒ 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 Ė 45% more than your current salary to make up for these lost benefits.

If this number shocks you, then letís 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 lionís 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 donít 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 employerís 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 Ė 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 (thatís 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 donít think Iím 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 ďextrasĒ 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.



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