The Advantages and Disadvantages of Self-Employment

Is there any doubt about how the epidemic has affected the workforce? We know that millions of Americans have quit their professions due to burnout and/or seeking to create their own enterprises with the goal of finding something that provides them greater personal satisfaction. More than 5 million new company applications will be received in 2021, a 55% increase from 2019. 1

More than likely, if you’ve been considering establishing your own business, you’ve questioned whether doing so would be a wise financial decision—or at the very least, you’re wondering about the differences between working for an employer and working for yourself. We’ve outlined the advantages and disadvantages of each choice below.

Taxes

When you go from being an employee to becoming your own boss, the biggest adjustment is likely to be in the area of taxes. There is a wide range of benefits that employees may get from their employers, including federal and state taxes, Social Security, and Medicare (more on those other benefits later). The IRS adds a self-employment tax to your federal and state taxes when you’re self-employed, in lieu of the standard Social Security and Medicare line items. Self-employed persons (or their tax experts) are responsible for calculating their own self-employment tax, which is often calculated by their employer. 12.4 percent of the self-employment tax rate goes to Social Security, and 2.9 percent goes to Medicare. You may also use the employer’s share of your self-employment tax in determining your adjusted gross income, just as an employer would. 2

Self-employed people may deduct company costs to lower their taxable income, while we’re on the subject of deductions. For the self-employed, frequent examples of deductible expenditures include phone and internet service, home office expenses, business travel, and health insurance. As an employee, however, you would not be able to deduct any of these costs. Finding deductions may seem like fun, but it also entails a lot of effort on the administrative side, such as keeping track of all of your expenses and ensuring that you have the evidence to support your claim.

Savings

Your pre-tax or Roth 401(k) contributions may go up to the IRS maximum of $20,500 for those under the age of 50, or $27,000 for those over the age of 50. (2022). Both as an employee and as an employer, self-employed people may contribute to their own solo 401(k). In other words, you may put in up to $20,500 for your own contribution and an additional 25% of your salary for the employer’s match.

To some extent, the ability to choose the custodian of your retirement assets might be considered a modest advantage of being self-employed.

Benefits

When it comes to benefits, many companies offer paid time off, health and life insurance, discounted fitness memberships, retirement plan matching or employee stock awards, donation matching, paid family leaves, adoption assistance, and sometimes even retailer-specific discounts to their employees as part of their compensation package. For some people, these perks are worth more than money, and they don’t exist if you’re self-employed.

Flexibility/Stability

The freedom that comes with working for oneself is a significant perk. Home offices, neighbourhood coffee shops, and even the shoreline are all viable options. You may set your own hours and aren’t constrained by the amount of vacation time you get each year. You’re also in charge of your own destiny, so you won’t have to deal with a boss who may cause a rift. On the other hand, there are no paid vacations or sick days. It requires a tremendous amount of desire and attention to be self-employed, which may necessitate working longer hours without the benefit of a manager’s supervision. Making sure you’re ready for times when earnings are smaller or erratic, particularly in the early stages, is critical. Entrepreneurs often talk about being okay with failure before finding success and remember that what you gain in freedom, you may lose in security as well.

While having a steady paycheck is a perk of working for someone else, it also implies that your financial security is tied to the performance of your employer. Long-term career growth and prospects, as well as easier access to long-term professional contacts, are all advantages of working as an employee.

If you’re contemplating a job shift, there are a number of factors to keep in mind, but there’s no need for you to go through them all on your own. While the final decision is yours, we suggest speaking with your Merriman adviser or clicking here to connect with one to learn more about your options and how they fit into your overall financial plan.

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