According to data from Pew Research, 14.6 million Americans were self-employed in 2014, which represents about 10% of the workforce. Studies show that self-employed individuals are not only happier than they were before leaving their jobs, but also tend to make more money and have a generally positive outlook about their business.
However, not everyone should quit their job and go solo. Here are some of the advantages and disadvantages of becoming self-employed.
There are several compelling reasons to leave the corporate world and become your own boss. For example:
- Potential for higher income -- According to recent data, the average freelance worker makes 45% more than an employee ($68,000 versus $46,800). The income potential for self-employment is virtually unlimited -- a disproportionate number of self-made millionaires (and billionaires) chose to work for themselves.
- More likely to enjoy your work -- Since you'll be your own boss, you get to decide which projects to accept and which ones to pass on. In other words, you'll likely be doing work you enjoy.
- Good tax benefits -- There are some great tax benefits for self-employed individuals. For starters, self-employed individuals can open their own 401(k) and contribute up to $18,000 plus 25% of what they make, as well as an additional $6,000 if they're over 50. They can also write off all business expenses, whereas employed taxpayers can only deduct expenses that are more than 2% of income. Those who work from home get additional tax benefits, such as the home office deduction, which allows for a deduction of home expenses (rent, mortgage interest, insurance, utilities) proportional to the size of the office.
- Flexible hours, location, and working conditions -- If self-employed individuals want a day off, or a long lunch break, they can choose to take one. In fact, only 29% of freelance workers report working more than 40 hours per week. Self-employment also entitles you to choose where you work and the conditions you keep. Want an office with a window? Go get one.
- Some expenses could go away -- Many self-employed individuals can eliminate certain expenses, especially while working from home. For example, the average American worker who commutes 20 miles each way to work spends more than $1,000 in gasoline just to get to and from the office each year. Self-employment can also help cut down on child care expenses for many people.
- No dress codes -- One of my personal favorite things about self-employment is that I can wear whatever I want to work. If I feel like working in shorts and flip-flops, that's exactly what I do.
- Job security is up to you -- You won't have to worry about layoffs if you're self-employed; your success or failure rests solely on your shoulders.
Keep in mind that being self-employed isn't a hands-down better deal than a traditional job. Here are some of the potential drawbacks you should consider, which help to explain why self-employment isn't for everyone.
- Risky --With most decisions in life, the higher the reward potential, the more risk you'll have to take on. Self-employment is no exception. By becoming self-employed, you take on a great deal of financial risk. You're responsible for generating your own revenue, and if you don't do a great job, you're the one who suffers.
- No employer benefits -- Many people underestimate the value of the benefits they receive from their employer. To give an example of a job that has a lot of self-employment opportunities, consider that an entry-level computer programmer in the Washington, D.C. area earns a salary of $63,343, according to Salary.com. However, the value of the benefits that come with the job -- such as retirement contributions, healthcare, paid time off, and others -- adds another $26,479 to the total compensation package. In other words, a self-employed computer programmer would need to earn nearly $90,000 in order to make up the difference.
- Some taxes go up -- While there are certain tax benefits to self-employment as I mentioned earlier, it's not all good news. With an employer, you are only responsible for paying half of the Social Security and Medicare taxes (7.65% combined). On the other hand, self-employed individuals have to pay the entire 15.3% rate -- known as the self-employment tax. In other words, a self-employed individual who earns $100,000 in a year would have to pay $7,650 more in taxes than an employee who earns the same amount.
So, who should go out on their own?
If you enjoy having consistency in your work hours or salary, or don't like taking risks, then being self-employed is probably not for you. However, if you have an entrepreneurial mindset, are disciplined and self-motivated, and aren't afraid to take some risks to get ahead, then you might find that the benefits of self-employment outweigh the drawbacks.