Who hasn’t fantasized about quitting their job and striking out on their own? The desire is perhaps especially strong for Americans, since doing it yourself and creating your own successes are so ingrained in our value system.
As someone who has worked for many small business owners, I’ve witnessed the drawbacks of running your own business firsthand. The information that follows isn’t meant to discourage you if entrepreneurship is a dream of yours. Rather, it’s designed to serve as a reality check for both those who are thinking of starting their own businesses and those who often feel disillusioned by being someone else’s employee.
Myth #1: I’ll earn more money if I start my own business:
Are you tired of seeing your company bill your work out to clients at $175 an hour and then pay you a mere $30 an hour? It’s depressing, isn’t it? But if you started your own business, you would no longer have an established, reputable company behind your name. Without that, you might not have access to clients who are willing to pay $175 an hour for your skills. Even if you do, you might not be able to sign on enough clients or get enough hours of work from them to match or exceed your current salary, or you might have to charge less, especially at first. You can only charge as much as clients are willing to pay, after all. Your income also won’t be steady–it will depend on how much work you find and complete in a given month, and clients don’t always pay on time.
Myth #2: I’ll get to keep more of the company’s income if I start my own business:
Does your current company frustrate you with money wasting practices–money that could be better spent giving you a higher paycheck? If you had your own business, all that wasted money could be yours instead, right? But when you run your own business, all of the things your employer provides you with to get your work done will become your expense. You’ll have higher phone bills to pay and office supplies to purchase, and depending on your line of work you may need the services of a lawyer from time to time. You’ll also have to pay for your own health insurance and any other benefits you’re currently receiving from your employer.
Myth #3: I’ll save money on taxes by starting my own business and incorporating:
Unless you’re planning to cheat on your taxes (which I don’t recommend), any money that you save through the tax benefits of incorporating can easily be eaten up by the additional taxes you become responsible for as a business owner. You will be responsible for the employer matching portion of Social Security and Medicare taxes (about 7% of your salary), federal unemployment tax, and additional state taxes, not to mention the fees for legally required business insurance, business licenses, and franchise fees (these items will vary depending on the type of business you establish and your location). If you have employees, you’ll have to pay worker’s compensation (you must pay this every year regardless of whether one of your employees is injured on the job). You’ll also probably need to hire an accountant to prepare your business tax returns, which can be significantly more complicated than personal income tax returns.
Myth #4: I’ll have more vacation time and get to set my own schedule:
Vacation? What vacation? Small business owners often take fewer vacation days, work longer hours on weekdays, and even work on weekends. If you’re working on a project for a client, you probably won’t be able to take a vacation in the middle of the assignment. If you have multiple clients, you might not be able to find a time when you’ve wrapped things up with all of them and can go on a vacation. The result is that you don’t take vacations at all or end up working from your getaway spot. Also, you’ll no longer have paid time off–any time you aren’t working is time you aren’t earning money.
Myth #5: I’ll get to be my own boss–I won’t have anyone breathing down my neck anymore:
Even when you’re self-employed, you still aren’t quite your own boss. Sure, no one technically tells you what time you have to be at the office each day, when to take your lunch break, and when you can go home, but clients’ demands will often end up determining your schedule. Your clients become your new bosses. You can always quit working with one of them, but you’ll lose that income, and you won’t always be in a position to take that risk.
Myth #6: Being self-employed will make my life easier:
You may not have to wake up at 6:45 and endure rush hour traffic any more, but the truth is that when you’re in charge, you take on a great deal of additional responsibility. You can’t afford to be lazy, because your income depends entirely on your own initiative. Also, keeping up with IRS requirements when you run your own business is no walk in the park. You can choose between lots of initial training and frustration while you try to decipher tax forms and figure out what you have to pay and when (and why), or paying an accountant to handle it for you (which will add quite a bit to your expenses). Mistakes on tax forms can cost you hundreds of dollars in interest and penalties.
When it comes down to it, if you’re motivated, hardworking, have lots of connections, and know how to sell yourself, it’s quite possible that you’ll make more money and enjoy your work more when you’re running your own show. But if you really just want to collect a steady paycheck and keep the rest of your time free from worry and available to pursue other interests, you’ll be better off both mentally and financially as someone else’s employee.
Like Saving Advice? Subscribe!
Subscribe to get the latest Saving Advice content via email.