Everyone makes their own decisions in life. During such tough times (or even when the economy is going great) it is a hard decision to make regarding whether to work for a corporation or to become self-employed. Often times people need to break free from their daily routines. Last year, an international traveler who had been working for corporations for many years made a decision to become self-employed for the first time in his life. Here are some of his words of wisdom…
What made you become self employed when all of your life you had been working for corporations?
When what you have been doing for a long time isn’t enjoyable any more, and finding a new job in the same industry that will offer the level of interest that you had experienced isn’t an option, working for yourself may provide all that you are looking for.
Did you find that self employment was rewarding?
Yes. However, with a busy schedule the additional work and concerns resulting from being ‘on your own’ was stressful to start. In addition there were concerns that were new to business, detracting from the main role you make for yourself in the self employed owner/operator role.
Can you give me an example of the concerns?
While contracts you may obtain pay their account in full, you are subject to the normal payment schedule assumed by the corporate accounts payable department. This is likely to result in payment of bills after 30 days at the best and as much as ninety days otherwise. You have to make sure that your cash flow accounts for this otherwise you are into taking loans and therefore paying out money not recoverable from the client.
Any other concerns?
Yes…taxes. You have to ‘withhold’ your own tax since the client will not do this for you. He may issue a Form 1099 at the end of the year but you have to have the money reserves to pay the IRS. Don’t think that you should be able to claim much more than you did when you were employed. In fact, as a self employed you have to pay the employment tax that your corporate employer would have paid on your behalf. Therefore instead of paying 6% employment tax you have to pay the full 12%, which makes a big dent in your income.
What about health insurance?
Don’t mention insurance! Anyone working in Massachusetts has to have medical insurance, by law. On top of that, insurance issued in Massachusetts cannot refuse an applicant because of pre-existing conditions which means that the insurance companies elevate their rates accordingly. Medical insurance is expensive as an individual. If you obtain insurance through an organization such as AAA or NASE the cost reduces because it is generally based on the number of members belonging to the organization but tends to be very basic, often referred to as catastrophic insurance. Insurance is a real concern.
What did you do about your 401K? Could you continue with it?
I decided to leave my 401K with my corporate employer. I could have rolled it over into into an alternative account but I decided not to for the time being. However, without the ability to save on a regular basis on a tax deferred basis there are additional tax disadvantages in addition to the self employed tax mentioned earlier. I decided that opening an IRA was my best bet. This is what I did.
This all sounds very negative. Is there anything good about working for yourself?
I am sure that with time all of the things that I mentioned earlier do get easier. The best thing about working for yourself is the virtual freedom and the knowledge that the harder you work the greater the reward (one hopes). There are a lot of groups out there that can help get familiar with things, even the IRS is somewhat sympathetic and helpful when you have questions, particularly when you are a novice at self employment.
As you can see, becoming self-employed is a decision that takes a lot of consideration and planning. It can be difficult to make ends meet when the costs add up, but if things go smoothly, the benefits have the potential to outweigh the costs you may incur.
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Photo: Jane M. Sawyer
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Tags: 401(k), corporate, Health insurance, Individual Retirement Account, insurance, interview, job, self-employment, Taxes
February 12th, 2009 at 10:11 am
Great interview with someone who has experienced both working arrangements. It shows some of the challenges of self-employment (in addition to the rewards).
It is good to note, too, that one can lightly jump into self-employment by building a business on the side first and then go full-time when the business is strong enough.