According to Stephen Fishman, the author of the exceptional “Working for Yourself,” “this book will help you make what’s good about self-employment even better, make the bad aspects less daunting, and – hopefully – make the ugly aspects a little more attractive.”
So, get ready to go over the advantages and drawbacks of being self-employed – and prepare for an introductory lesson on “the nuts and bolts of self-employment law and taxes.”
Working for yourself: the good
There are many advantages to being self-employed. The major ones are the following four:
- Independence. Being self-employed means being the master of your own (economic) fate. You can choose how, when, and where to work, and for as much or as little time as you want. They say that time is money, but the equation is really only true for the self-employed. If you work for someone else, you have to ask your boss for a raise if you think that your salary doesn’t express the quality and quantity of your work. You’re at the mercy of their judgment. However, if you’re self-employed, you are the one who chooses between time and money: if you want more cash, you just go out and find some more work. Finally, being laid off from a job is not a pleasant experience. Fortunately, when you’re self-employed, you’re not dependent on a single company, so firing is not nearly as traumatic.
- Higher earnings. Although when you’re self-employed how much you get paid is actually a matter of negotiation and subjective preferences, studies show that you can earn far more money when you’re self-employed than as an employee of someone else’s company. According to the Wall Street Journal, “self-employed people who provide services are usually paid at least 20% to 40% more per hour than employees performing the same work.” Of course, this is mostly down to the fact that companies don’t have to pay for freelancers almost all of the taxes and benefits they otherwise must, like Social Security or health insurance. But it is also down to corporate greed. For example, if you are a software developer or a designer, there’s a good chance your company pays you about ten times less money than it charges your clients. A public relations employee mentioned by Fishman found out something similar: the firm she worked for billed her time out to clients at $125 per hour even though she actually earned only $17. She then became self-employed – charging $75 per hour.
- Tax benefits. Even though there are penalties if you underpay, you decide how much of estimated taxes to pay the IRS. Just as importantly, the federal and state taxes aren’t withheld from you automatically, so you can hold on to your money longer – possibly even make it work for you in the meantime. You can also take advantage of many tax deductions that are unavailable (or, sometimes, limited) for employees, such as office, travel and equipment expenses, as well as insurance payments. Finally, you can establish a retirement plan that has tax advantages.
- More privacy. According to federal law, employers must report “the name, address, and social security number of each newly hired employee to the Department of Health and Human Services.” However, when you’re self-employed, that doesn’t apply to you. So, if you want to be spied less by the government, working for yourself is the way to go.
Working for yourself: the bad
Being self-employed comes with a few drawbacks as well. Here are some of the main ones:
- No job security. Even if your employer’s business is not going well, many laws protect you as a regular employee. However, when you’re self-employed, everything depends on you – including finding a way out of difficult situations. You can’t just wait for the workday to finish and expect a paycheck to arrive at your address by the end of the week. Even if you’re sad, depressed, or unwilling to work – you’ll still have to earn it yourself.
- No free benefits. Forget about health insurance and paid sick leaves! Forget about paid vacations and retirement programs as well! As we said above, when you’re self-employed, time lost means lost money. So, if you don’t earn enough money, you might not have enough time to enjoy your holidays or watch Netflix shows when you’re sick.
- No unemployment insurance. Traditionally, when you lose your job, you’re eligible to receive state-provided cash benefits. Not if you’re self-employed.
- No workers’ compensation. If you injure yourself at work, you’re entitled to collect workers’ compensation benefits. However, self-employed people are usually exempt from such programs, their only recourse being an expensive and lengthy lawsuit against the hiring firm.
- No free office space or equipment. Being self-employed, you’ll have to be the one buying yourself everything you need to excel at your job – from a state-of-the-art laptop and a 4K screen to licensed programs and all kinds of office equipment.
- Few or no labor law protections. Employees are protected from unfair exploitation by their employers by way of several laws that regulate their minimum wage, proper reimbursements for overtime work, as well as their right to unionize. These don’t apply to the self-employed.
- Complete business responsibility. Being self-employed means being responsible for a few important things your employer would traditionally be. It’s not only that you’ll have to file a far more complex tax return – you may even have to hire someone to keep your records.
- Others may discriminate. It’s more difficult for the self-employed to obtain disability insurance, and far more expensive to get premium health insurance without the benefit of an employer’s group rate. Also, be prepared to be discriminated against when you buy a house: lenders are suspicious of self-employed borrowers.
Working for yourself: the ugly
Being self-employed is sometimes “downright ugly” – especially so in the following three aspects:
- Double social security tax. Employees pay a 7.65% tax on their salaries. That’s because their employers pay the other 50% of the Social Security and Medicare tax. However, when you’re self-employed, you’re simultaneously considered your own employer and employee, so you’re asked to pay the entire tax yourself, which amounts to a massive 15.3% of your income. Add to this the federal and the state income taxes, and you get why the self-employed earn more on average than traditional employees.
- Personal liability for debts. If you work for someone, you just have to do your job, caring how well the company is doing only to a certain amount. And that’s because, if the company fails, you’ll owe nothing to nobody. However, if you are a sole proprietor (as most self-employed people are), you are personally liable for your debts. So, if your business fails, you could lose a lot more than your paycheck for the next month.
- Deadbeat clients. One other thing you don’t care about when you work for a company is when your company’s clients will pay your employer. However, when you’re self-employed, that’s more than a simple worry: if your clients don’t pay you on time or per agreed, you might face unpredicted financial problems. And the government won’t do – and can’t do – anything about it. Asking for a down payment, using periodic payment schedules, and, of course, written agreements can mitigate the risk. However, be aware that there will probably be deadbeat clients – and you will probably have to deal with them yourself. Fortunately, there are nowadays several freelancer platforms – and even a Freelancers’ Union – that may have made this a bit easier.
Choosing the legal form for your business
There are several ways to organize your business as a self-employed person but don’t take this decision lightly: it might be the most important one you’ll have to make. The form you’ll choose will have “a big impact on how you’re taxed, whether you’ll be liable for your business’s debts, and how the IRS and state auditors will treat you.” These are the four main business forms and their advantages and drawbacks:
- Sole proprietorship. One-owner business is the most common variant. It is also “by far the cheapest and easiest legal form for organizing your business.” You neither have to get permission from the government nor do you have to pay fees. You just start doing business. Come D-day, you report profit or loss on your personal tax return – no other complications whatsoever. The main disadvantages of being a sole proprietor is that these types of organization are not considered separate legal entities. So, you will be personally liable for any business problems – including debts. Unfortunately, the sole proprietorship business form “won’t help you establish that you’re self-employed in the eyes of the IRS or state auditors.” Consequently, if the government decides that your relationship to a certain client is similar to that of an employer-employee, you might have no choice but to pay heavy fines and back taxes.
- Corporation. Unlike sole proprietorships, corporations have a legal existence separate from their owners. Consequently, clients have limited personal liability for business debts and far less risk from government audits. There are two types of corporations: C and S. C corporations are taxed separately from their owners. This gives owners the chance to split the corporate profit among them and the corporation, paying a lower overall tax rate as a result. However, it’s also a double taxation threat. In the case of S corporations (which don’t pay income taxes), shareholders divide income and losses. If you’re the owner of an S corporation, you can save on employment taxes by taking distributions instead of a salary. The main disadvantage of corporations is that they are more expensive to both found and operate than sole proprietorships.
- Partnership. This business form is very similar to sole proprietorships – it’s just that it requires more than one owner. The benefits remain: it’s easy and inexpensive to create and operate a partnership, and you and your partner will report your profits and losses on your respective personal tax returns. However, you will be – once again – personally liable for business debts. And there’s no beneficial employment tax treatment in the case of partnerships.
- Limited liability company (LLC). In a way, they are the middle ground between sole proprietorships/partnerships and corporations. LLCs are better than sole proprietorships in that they grant owners limited liability for business debts while allowing them to allocate profit and loss differently than ownership interests. And, when compared to running a corporation, it is far less expensive to create and operate an LLC. However, unlike an S corporation, LLCs don’t offer the opportunity to save on self-employment taxes, which is probably their biggest drawback.
It’s impossible to summarize “Working for Yourself”: almost every page is packed with useful pieces of advice, and the best any summary can do is only provide a glimpse into what Stephen Fishman’s all-in-one resource actually offers.
To our eyes, it is more than just another book about working from home: it’s an encyclopedia, a manual, a reference guide to all things the self-employed might be interested in. Plus: it’s handily structured and continually updated!
Don’t start working from home before you buy this book. And even if you already do – do not hesitate to buy it.