It is tempting to compare your self-employment earnings to your old salary, but 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 the two, consider the employment benefits you are giving up and the extra costs of doing business that you have taken on.
You may be happy to discover that you can bill an hourly rate that exceeded your average hourly rate as an employee. The problem is not all of 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.
Most employers offer some sort of benefit package. Potential benefits you may be missing out on include:
- Paid Health Insurance, Disability, & Life Insurance
- Company Match 401K
- Reimbursement on Mileage
- Paid Continuing Education, Training, & Conferences
- Regular Raises & Bonuses
Now that you are self-employed, you will have to pay the bill for all of this yourself. However, you can recuperate some of the costs as deductions from your taxes.
No Paid Time Off
As a small business owner (self-employed, freelancer), you often have more flexibility in taking time off for vacations and personal issues. However, that is time you are not getting paid for. Any time that you plan to take off needs to be worked into your billable hours. A standard benefit package of two weeks off, five sick days, and ten holidays works out to be about five weeks off each year. To compensate for this time off, your billable rates would need to be around 10% higher than your hourly rate as an employee.
One of the major perks of self-employment is getting to work from a home office. However, running a business out of your house isn’t free. As your company grows, you will notice that you will need more and more office supplies around the house. Your laptop may eventually need to be replaced because it is no longer compatible for business use or you may need a new desk or chair. These are expenses that you would have to pay.
Regulatory and Tax Costs
When you worked with an employer, they were responsible for paying half of your employment tax, which is currently 15.3% of wages. When you work for yourself, you become responsible for the whole 15.3%. That means you 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 small business owner, you are not contributing tot his fund, which means you will not be able to file an unemployment claim if things go south with your business. Employers are also obligated to hold your job for you if you need to take leave under Family Medical Leave Act, however clients are have no such obligation.
Sales Tax & Use is another tax you may responsible for, depending on your state. Employers collect and pay this tax when selling products or taxable services. In Texas, good and taxable services are taxed at a rate of 6.25% but local taxing jurisdictions may impose a sales and use tax of up to 2% for a maximum combined rate of 8.25% For more information, contact your state comptrollers office or website.
Working for yourself is not just about making money. It can be an exciting and rewarding experience to run your own business. However, to keep up your lifestyle and meet your obligations consider these costs when setting your business rates. Typical consulting rates for business owners starts at two to three times the average employee hourly rate. To mitigate some of the extra expenses, make sure to maximize your business deductions each year to lower your tax burden.