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SELF
EMPLOYMENT
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 it’s 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 I’m not referring
to the “free” 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 – 45% more than
your current salary to make up for these lost benefits.
If this
number shocks you, then let’s 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
You might
be thinking that you pay premiums for these products
already. Even if you do, your employer is most likely
paying the lion’s 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 don’t 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 employer’s 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 –
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 (that’s 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 don’t think I’m 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 “extras” 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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