Being an employee can be the pits.
Unless you have the mother of all dream jobs, you've suffered in your job. From the pressure to sell and produce results to kissing up to your bosses, you've paid your dues, hoping for the promise of a promotion, a raise, or a bigger piece of the corporate pie. You've put in long hours. You've endured countless boring meetings and conference calls. Heck, you might be pretending to pay attention right now while you're sneaking a peek at the Fool. But at the end of the day, what do you have to show for all of your efforts? Nothing!
Well, not exactly nothing. You probably get a paycheck once in a while. Nevertheless, putting up with the trials and tribulations of being an employee for years or decades is enough to make anyone at least consider what it's like on the other side of the fence. Even if you work for one of Fortune's Top 100 employers, including Genentech (NYSE: DNA ) , Valero Energy (NYSE: VLO ) , or J. M. Smucker (NYSE: SJM ) , working for yourself appeals to the independent side in everyone.
Owning your own business does indeed have some nice aspects. You decide when to work, how to do your work, and who your clients will be. But it's not all wine and roses. Even if you have a good idea for your business and the drive and determination to give it your best shot, you need to be aware of the costs of going out on your own before you take the leap.
Replacing what you give up
If someone else employs you right now, it's important for you to understand everything you'll give up if you quit. You will likely want to make sure that you earn enough money to cover not only what you received in your paycheck but also to pay for some of the benefits that you may have had as an employee.
For instance, your employer may be subsidizing or completely covering the cost of health insurance for you and your family. You may also have group insurance coverage that will provide payments to you or your family in the event of your death or disability. If you are eligible to participate in an employer-sponsored retirement plan, then your employer may be making additional contributions into your retirement account, either by making an employer-matching contribution or by offering profit-sharing.
You'll take on quite a few expenses as an employer. At the bare minimum, all employers must pay taxes to Social Security and Medicare. This is in addition to the taxes your employer withholds from your paycheck. In addition, most states require businesses to make payments for other services, including unemployment, disability insurance, and worker's compensation funds.
Don't forget that you may have a nice office right now, with modern furniture and access to the latest technology. You may also be able to attend industry conferences, training sessions, and continuing professional education courses. You may enjoy support from an assistant, back-office staff members, and a receptionist. Your employer pays for all of these things. Your employer might also be covering the full cost of meals, entertainment, and travel you incur while working with a client or trying to obtain new business. You may even have your employer covering the cost of maintaining your professional license or other regulatory or government-imposed fees.
Know the economics
Of course, there's an obvious flip side to all of the expenses your employer pays for you: Your employer gets to keep all of the income your work generates. In service-related industries that charge for work on an hourly basis, you can pretty easily figure out how much money your employer makes from your efforts. For instance, consider a typical large big-city law firm. Your employer may bill out your time at $250 per hour and require you to bill 2,000 hours each year, for which you receive credit only if your client actually pays the full billed amount. Your employer is earning gross income of up to $500,000 from the work you do each year. If you earn a salary of $125,000, and the total value of benefits, office overhead, support staff costs, reimbursed business costs, and anything else your employer pays on your behalf is another $75,000, then your employer keeps a net profit of $300,000.
This example illustrates a situation involving a large profit margin. But many industries don't regularly have significant profits, and so there may be less financial incentive for you to go out on your own. Indeed, with many startup companies, making a profit at all is a difficult proposition, especially during the first few years of operation.
You also need to keep in mind that in some cases, working for a large, well-known employer opens doors to clients who might not pay attention to you if you were self-employed. While you may be successful in persuading some of your existing clients to continue working with you if you leave your employer, you shouldn't count on keeping them all.
It's easy to decide that you want to make a change in your life. It's a lot harder, however, to figure out the best way to make that change. Although you should consider all of the costs and benefits before you make a final decision, being self-employed can be a rewarding way to make a living. If you're ready to take that step, read on. And to take command of your finances no matter what you choose to do, consider a risk-free trial to the Fool's new personal-finance service, GreenLight.
Fool contributor Dan Caplinger stopped working for the Man and hasn't looked back. He doesn't hold shares of any of the companies mentioned in this article. The Fool's disclosure policy is always working for you.