It’s tempting to compare your self-employment earnings to your old salary. In truth, the two figures aren’t really comparable. There are many hidden costs involved with self-employment that you avoid as an employee. To properly compare a business opportunity with an employment opportunity, consider the employment benefits you’re giving up and the extra costs of doing business that you’re taking on.
As a contractor, you may be happy to discover you can bill an hourly rate that exceeds your average hourly rate as an employee. The problem is, however, not all your hours as a small business owner are billable. Administrative tasks like building a company website, networking, finding clients, bookkeeping and invoicing can’t be billed.
Even if you’re working on a project basis, getting the work done may be harder than you think. You won’t have mandatory meetings and workplace distractions, but you still need time to stretch, walk around and give your brain a periodic break from work. To be on the safe side, Freelance Mag recommends freelancers plan for only six hours out of each day to be billable.
You most likely had at least a few benefits and perks at your old job. Potential benefits you’re missing out on are:
- Paid health insurance, disability and life insurance
- Company match on your 401(k)
- Reimbursements for mileage
- Paid continuing education, training, and conferences
- Complimentary coffee, snacks and periodic lunches
- Regular raises and bonuses
Now that you’re self-employed, you have to foot the bill yourself for all of this. Although some perks—like coffee and lunches—aren’t that expensive, buying your health insurance and making up 401(k) contributions can easily cost thousands of dollars a year.
No Paid Time Off
As a freelancer or small business owner, you often have much more flexibility in taking time off for vacations and personal issues. However, that time off isn’t paid for. Any time that you take for illness, vacations or holidays needs to be worked into your billable rate. A standard benefits package of two weeks off, five sick days and ten paid holidays works out to be five weeks off each year. To compensate for five weeks off, your freelance rates need to be around 10% higher than your hourly rate as an employee—just to account for missing out on paid leave.
One of the major perks of being self-employed is getting to work from a home office. Still, running a business out of your house isn’t free. Even if your laptop is working fine now, it will eventually need replacing, and you’ll have to foot the bill. Now that you’re at home all day, you may also need to buy a different chair or desk, or invest in a computer monitor to make your at-home setup more ergonomic. You’ll probably also notice a slight uptick in your utility bills now that you’re staying home all day.
Regulatory and Tax Costs
When you work for an employer, he’s responsible for paying half of your employment taxes, which are currently 15.3% of wages. Working for yourself, you’re responsible for both the employer and employee portion. That means you’ll owe an extra 7.65% in Social Security and Medicare taxes.
Employers also pay federal and state unemployment taxes to fund benefits for employees that are laid off or out of work. As a freelancer, you don’t contribute to this fund, which means you can’t file an unemployment claim if things go south with your work. Employers are also obligated to hold your job for you if you need to take leave under the Family Medical Leave Act. Your clients, on the other hand, have no obligation to save work for you if you need a break.
Working for yourself isn’t just about the money. It’s exhilarating and rewarding to run your own business the way you see fit. Still, to keep up your lifestyle and meet your obligations, work in these costs when you set rates or consider an opportunity. A typical consulting rate for business owners starts at two to three times the average employee hourly rate. To mitigate the extra expenses of being self-employed, make sure to maximize your business deductions each year to lower your burden once tax season comes along.