The buzz these days is “be your own boss” with this grand idea that by working for yourself you can live the lifestyle you have always dreamed of. Now don’t get me wrong, it’s a pretty good gig (which is why I myself find myself in this demographic), but lately I have been freshening up the resume and exploring other options I might test out within the next 3-4 years. Here’s why.
For this example, I am going to use the idea that you are working in an average field and, after normal operating expenses for your business, you are netting $75,000 a year. Not bad. Right?
1) Insurance & Benefits
It has been said that when a corporation hires a new employee, it costs them $100,000 a year to keep him/her on. A huge chunk of that is benefits. While many companies are starting to implement a sharing system where they cover the $3000-$5000 health costs before coverage kicks in, it still costs a company a boat load of cash to offer these benefits. In 2008 the costs for family coverage were $12,680 for family coverage. I am going to be generous and say for a small family with minimal coverage you’ll pay around $10,000.
2) Business Travel
In almost every industry there is travel. Whether it is to meet with clients or negotiate a new deal, or perhaps to a conference or expo, almost everyone travels for business. Let’s say you travel twice a year. Plane ticket – $500, hotel room – $150, car rental – $200, food – $100, other(round of golf, entertainment, etc) – $50. At $1000 a pop, you are looking at $2000 a year.
3) Taxes
Yes, taxes. I’m just gonna be generous again and say 20% (remember, the $75,000 is after business expenses so I am assuming you have tried every trick in the book to deduct everything but the kitchen sink, unless of course you used that new kitchen sink to wash your hands before a meeting). Total for taxes $15,000.
4) Retirement Matching
Oh yeah, that. So you are living the life of your dreams, but unless you put some of this away, you’ll spend the last 30 years of your life wondering how to use a brainsponderscope (what is surely coming after the computer dies out, you’ll probably have to ask your grandkids how to use it). I remember hearing that the typical 401k deal with most corporations is that they match about 50% of your contributions, up to 6% of your salary. So for you, that would be 50% of $4,500 = $2,250 extra you’ll have to put away.
5) Mortgage Interest Rates
Ah yes, you want to but a house but because you are self employed, you probably wont get those fabulous interest rates advertised in banner ads, even if you put down a down-payment that could feed a third world country for a week. An estimate a realtor friend of mine made was that you’ll pay upwards of $7500 more a year (both in interest paid and lost interest from a giant down-payment not being in an account earning interest).
Ok, so let’s do the math. You are are working your hardest and you tell people you make over $75k a year. Awesome, but after all is said and done…let see, carry the one, subtract 5, and bam, you are actually making ($10,000 + $2,000 + $15,000 + $2,250 + $7,500 = $36,750) a total of $38,250. Not bad, but not that good either.
Self employment is great, but be smart about how much it really costs and how much you will really make.
