Many employees dream of quitting their jobs and starting their own businesses. While the dream of running your own business probably sounds appealing, especially if you’ve been working a 9-to-5 for years, working for yourself presents more challenges than working for someone else. You should think carefully about self-employment before quitting your regular job. Self-employment is a great path for some people, but it’s not for everyone. Here’s what you need to know:
Self-Employment Means No Steady Paycheck
When you work for someone else, you know your paycheck is coming on payday. However, with self-employment, you only get paid when a customer buys a product or service from you.
Furthermore, before you reap your profits, you have to pay the bills associated with operating your business. For example, if you sell products, you have to buy inventory. If you have employees, you have to pay their wages and payroll taxes. If you have a website, there’s a whole list of expenses associated with that. Self-employment means your income won’t be consistent or guaranteed, which is challenging if you’re used to getting paid per-hour.
Cash Flow Management
One of the biggest reasons that most new businesses fail is poor cash flow management. For example, if your expenses are greater than your revenue, your business will fail. If you have employees and can't make your payroll, your employees will quit, unless you pay them from your own pocket. If you don't have enough money on hand to make your tax payments, the IRS (and possibly your state tax commission) will close your business. Unlike being an employee, self-employment involves weighing profits against expenses.
Health Insurance and Retirement is on You
Most full-time workers receive health insurance and retirement benefits as part of their employee benefits plan. If you’re lucky, your employer foots most of the bill for these costly benefits. However, if you choose self-employment, you’re responsible for 100% of the costs for your health insurance and retirement plan. That means in addition to earning enough money to pay yourself a salary; you will need to earn enough to pay for health insurance and put some cash away for retirement.
Payroll taxes fund Social Security and Medicare. As an employee, you and your employer split payroll taxes 50/50, each paying 7.65% of your wages. However, when you’re self-employed, you’re responsible for 100% of those taxes - the government calls this the self-employment tax. Currently, the self-employment tax rate is set at 15.3% of your net income. Therefore, you will pay more taxes working for yourself than you would if you were working for someone else.
Self-Employment is Challenging, and Most New Businesses Fail
According to the Small Business Administration, 66% of all new businesses fail within the first ten years. That means you could lose all the money you invest in starting your business - self-employment isn’t a sure thing. Before you invest all your savings in a new venture, talk to an experienced financial advisor to assess the viability of your business plan.
Before you trade in your 9-to-5 job for a life of self-employment, understand that you’re saying goodbye to a steady paycheck. If your business is unable to meet its expenses, you will soon be out of business, and good cash flow management is essential to the survival of your business. You’ll be giving up many of the benefits associated with most full-time jobs - like health insurance and retirement plans. That said, self-employment can be a rewarding path that awards you unbeatable freedom and a sense of fulfillment that you may never find as an employee. It’s not for everyone, but neither is life as an employee.