Have You Thought About the Costs of Being Self-Employed?

The dream of self-employment is something that has gained a lot of popularity in recent years.  Thanks to the Internet, almost anyone can start a side hustle from home.

Not only is it technically easy to become self-employed, it’s also relatively inexpensive — depending on the strategy you use.

A number of side hustles require only a computer and a fast Internet connection.  Even if you choose a more expensive venture, you can still save money by starting out at home.

Because of the ease involved, and the low startup costs that are possible, many would-be solopreneurs fail to account for other costs that they might run into.  While being self-employed works for many people, it isn’t the only satisfying career path.  And there are costs involved that you might not have thought about.

Some of the costs of being self-employed include:

Lost Benefits

Honestly, this is probably the largest cost you experience when going from employed by “the man” to being self-employed.

Think about the benefits and perks that come with your job.  One of the biggest benefits you receive is health insurance offered through your employer.  When you transition to self-employment, you suddenly no longer have access to discounted health insurance.  You can look for group plans, and individual plans, but the entire cost is on you (although you can offset with the help of tax deductions, as well as a Health Savings Account).

Carefully consider other benefits offered by your work, from the cafeteria plan, to reduced child care, to discounted gym memberships.

All of these are costs that you will have to bear on your own once you join the ranks of the self-employed.

Difficulty with Certain Transactions

costs being self-emplyed

Self-employment isn’t all fun and games. There are real costs to being self-employed you need to consider.

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Another consideration is the costs related to performing certain transactions.

You can still get a mortgage if you are self-employed, but it’s more difficult.  There are some things you can do, like pay yourself a reasonable salary and issue a yourself a W-2, but many self-employed people don’t do these things.  Instead, they have sole proprietorships, or a LLC.  As a result, you might have to pay a higher interest rate on your mortgage or other loans.

I didn’t have to pay a higher interest rate when I bought my first home, but I did end up needing to go through an income audit.  I had to pay for the audit, which verified my self-employed income for the mortgage lender.  What you pay varies according to the accountant, and where you live, but you can expect to pay anywhere between $300 and $1,000, depending on how in-depth the audit is.

Other transactions might be more difficult to complete as well, without the regular pay stubs that a more traditional job offers.  Make sure you understand some of these costs before you quite your day job for self-employment.

Variable Income

Don’t forget about variable income.

If you don’t adequately budget for your variable income, it can cost you in terms of fees and other costs.  There have been times in the past when a client’s late payment, or some other issue, has led to overdraft fees as money came out of the bank for automatic payments.

Your cash flow should be arranged in a way that makes sense for your situation, and it’s important to know how to budget when your income is variable.  Otherwise, you could find yourself in debt, racking up the interest charges, and paying all manner of fees.

Emotional Costs

Don’t forget the emotional costs involved with being self-employed.

We often picture those that work for themselves as having unlimited leisure time.  However, this isn’t always the case.  In fact, if you are just starting out, you might have less free time.  It’s hard work to start out as a solopreneur — and can be even harder work if you hire employees on top of that.

Working for yourself often means that you don’t get to take days off, and when you do, you usually have to make up for it somewhere by working even harder to catch up.  Self-employment can weigh on your personal relationships as well, cutting into family time and impacting how you interact with others.

Make sure you understand this, and that you account for it, before you decide on self-employment.

Bottom Line

I love being self-employed.

However, there are some times when I look at some of my employed friends and think it might be nice to “clock out” and leave the job at the end of the day, plus enjoy perks like employer-sponsored health insurance.

In the end, I think the costs are worth paying.  But you should make sure that they are worth it for you before you take the plunge.

What other costs of being self-employed do you know of?

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Published or updated August 30, 2012.

Comments

  1. For me, the biggest one is the higher interest rate. My wife and I will be looking to buy in a few years and we will need to get the lowest rate possible due to the cost of living where we are. My wife also works, so I am able to piggy back on her employer for health benefits.

  2. There aare definitely more costs. I estimate I would have to make 1.5 to 2 times my salary to have the same standard of living. In the end that would work out better but it would be rough in the beginning.

  3. Squeezer @Personal Finance Success says:

    I have thought about becoming self employed, but the hardest part is picking up customers.

  4. I find being self employed quite lonely :-( But it’s OK because when I am rich I can employ people to keep me company

  5. Depending on what you do, you may have office rent expenses. You will also be responsible to cover the costs of what ever equipment you need (PC, Fax, pens, paper, etc.)

    There may be some hassles depending on how the business is structured. My wife has a daycare and we just operate it under her name and SS#. We tried to get a business plan for our phone, but couldn’t. We needed a separate TaxID#.

    Some things are also more expensive for businesses. Water, Garbage, phone, etc, may all be higher than what a residential customer would pay.

  6. Jenna, Adaptu Community Manager says:

    You have to file taxes and figure out your retirement plans. If you work for a publicly traded company you have to give up some of the “perks” too.

  7. Yep, you need to make a serious amount more than you would as an employee! Even freelancing on the side (at least here) is taxed much higher. I hadn’t really thought about how that might affect qualifying for a mortgage, either, as buying a house is definitely on my wishlist.

  8. I think this is a great post. Many people don’t realize the perks that come with a regular job. This includes regular insurance at a group rate. It’s great to be self employed, but if you look at the expense of being self employed. Is it really worth it? Consider the group rate for health insurance is much lower than if you would get an individual insurance. The employer in some cases matches your retirement contribution.

  9. The post is correct in suggesting there has never been an easier time to be self-employed; especially if you can run whatever business you have planned from home. If you think it’s going to be easy then forget being self-employed as you are deluding yourself and a self-deluded person is more likely to fail.

    When I was self-employed, I had never felt stress like it before. It is nice to be able to simply leave the pressures at the office as an employee and enjoy the relative safety of a steady salary but some of us simply love a challenge no matter how insane it may seem.

    Self-employment is not for everyone; you have to be a certain type. If you love a challenge, are disciplined and have a passion for what you are doing then self-employment is for you. If you lack self-discipline, are not prepared to work longer hours and take risks, then simply stick with your day job.

    Yes there are financial considerations such as healthcare but if these sort of things are going to put you off the challenge of self-employment, then self-employment was never for you; it’s that simple.

  10. Miranda,

    As an sole trader (sole proprietorship in American English), your post is a good reminder of the costs of being self-employed. Have you heard about the term “business employment”? It is an interesting alternative to being employed or self-employed.

  11. Heather Stone says:

    Miranda,
    These are a lot of very good points. Of course, one option, assuming you make enough money, is to incorporate and pay yourself a steady salary out of corporate profits holding back enough for some kind of benefit package. In this way, the company controls your income by doling it out on a regular predictable basis. The only thing you need to worry about is continuing to create and sell your products or services. That will keep enough money in the coffers to keep those steady payments coming.

  12. You’ve made some very valid points. I’ve been self employed for 10 years and all of the above apply to me but I wouldn’t change it either. And sometimes I do envy friends who are able to switch off at 5.30pm whilst I’m still working. One problem I have found is taking time off means no pay. And also it’s very hard to take time off unless you go away and leave your laptop and phone behind. Also it’s rare that someone steps in and does your job while you are off so you have to double up when you return. Sorry – had a little rant there lol. But I still wouldn’t go back to being employed. Thanks for sharing on Bizsugar.com as always.

  13. Being self-employed can be really hard especially when you’re just starting but it gets kind of better as you go. What i love about being self-employed is that i have more flexibility in choosing the types of work i do and scheduling when i work. Although there could be a lot of disadvantages to being self-employed, i think most problems can be alleviated with good preparation and planning.

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