I thought it’d be a fun exercise to do a comparison between working for a company and working for yourself.
Salary:
The general rule of thumb is that you work for yourself if you can make more money — at least increasing your salary by 50%.
So if you normally earned $50,000 before, you should be able to earn at least $75,000 if you go out on your own.
That extra $25,000 is to cover retirement, healthcare and whatever else you have to deal with that a company would handle otherwise.
If it’s for the same amount of money, I don’t really see the point unless you really hate being under someone else’s thumb.
From my perspective:
They used to charge $150 – $180/hour for my services.
I cut out the middleman, and went from earning $30/hour (my employee salary) to $90-$130/hour.
I make more money, and I charge the client less.
Time:
In a lot of cases, you work MORE because you have to do your job and also do all the other tasks in the company like handling the books, reading contracts and dealing with the client directly.
If you run your own business you have to handle everything from vendors to customers to your own employees.
But it’s fulfilling in the sense that you know it’s directly affecting you and your earnings, so you are more motivated to do the work happily.
From my perspective:
It is the total opposite for me.
I actually work less now, than I ever did with a consulting company.
The reason being that I used to work 50-60 hours a week with a consulting company, but was only paid for 40.
I was working all that over time for free, PLUS filling out all those performance tracking and project review debriefings, all of which took
Now, I work no more than what I am allowed to bill, which ranges from 36 – 40 hours a week.
Over time has to be approved directly by the client, or I don’t do it.
And if you don’t want to go on a project that makes you travel a lot, you can say “No, I’m not going.”
With a company, you don’t have a choice.
Healthcare:
Have to cover your own, or get your own private insurance plan.
From my perspective:
Doesn’t really apply to me as I live in Canada. My out-of-pocket expenses are around $600/year which include seeing the dentist twice, and buying prescription pills.
I am actually saving money, because I wasn’t even taking full advantage of the company plan to begin with.
Retirement:
Have to handle it all on your own, but this was sort of what I did before as well — contributed to a retirement plan AND saved on the side.
Office Supplies:
Have to handle it all on your own, but you don’t need much if it’s just you.
And you can buy exactly what you want, instead of bitching about what they bought! 😛
Resources:
You’re the only resource, but there’s an informal network of other freelancers who are more than willing to help you out.
Paperwork, Taxes and Deductions:
Lots of paperwork to deal with for your company is the downside, but now:
- you have control over what is being spent and what isn’t
- you don’t have to deal with someone to approve any purchases
- you benefit directly from the tax breaks, rather than the company taking them
When your laptop dies, you don’t have to ask anyone for approval to get a new one (and by new, I mean refurbished).
So if my laptop dies, I just buy another one under the company.
19% Flat Rate
I think it’s a BONUS that I only pay 19% as a flat rate in taxes for my small corporation’s earnings.
My company can earn up to $500,000 before being charged more, but under $500,000, it’s considered to be a small business.
If I were to earn that kind of money through a company, I’d be paying at least 40% in taxes.
$20,000 in dividends each year
I take the money out as dividends each year, to a maximum of $20,000 (it’s all I need anyway), and as a result, I don’t pay exorbitant personal income taxes.
$20,000 might not seem like a lot, considering that in 2009 I spent around $30,000… however, I also have some of my living expenses written off under the company.
No sales taxes paid & expenses are deducted from gross taxable income
If I buy something for the company, I don’t pay the sales tax AND it’s an expense before taxes for my company, so I save on the income tax as well.
Check out the comparison chart:
Let’s assume I buy a $100 item:
As an individual, I’d pay $113 with 13% sales tax, but under my corporation (if it’s a legitimate expense), I pay $81.
Naturally, I can’t buy anything not related to consulting, so a new wardrobe, or anything that is not used for business, cannot be claimed.
This is also not an excuse to go on a spending spree because of the savings, because you are still spending the company’s money, which is eventually YOUR money and what you buy is not “free”, it’s just cheaper.
This is also the reason why I bought a used minivan instead of a fancy new car for the company.
THE DOWNSIDES
- Fairly risky: may not work for large parts of the year (hello 2009?)
- May have to travel a lot and/or cover expenses which lowers my earnings
- No paid vacation, sick days or leave — it affects your income directly
- Managing myself & the client’s expectations
- Have to do all the work of a company by myself on my off time, for example:
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- Filing taxes and other statements quarterly
- Bookkeeping — My budgeting spreadsheet comes in handy here
- Analyzing my cash flow and expected income
- Invoicing and Accounts Receivables — Making sure I get paid
- Scheduling — If I travel, I need to make sure I am on top of the bookings
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So I hope I’ve given a brief but comprehensive Pros and Cons list of both: working for a company or for yourself.
Personally, it’s a much better and easier deal to be a freelancer than to work for a company, especially as an IT consultant who works on projects rather than really being an employee.
Yes working for yourself IS probably the best. But granted the way I work… I would be lost for an hour a day as I took a lunchbreak from myself and then I would have to get angry at myself when I didn't get me my work on time. And then I can only imagine the arguments as I tried to convince myself I had a reason to leave myself early. I mean the logistics of working for myself are just too confusing. Its way easier to slack off for somebody else.
Wow, thank you for that. I've been considering what it would be like to work for myself. Not sure I know yet what I'd be doing, but I'm tired of the corporate rat race.
Healthcare is a huge expense (in the usa). I could just hop on to my husband's insurance plan, but a individual plan would be really expensive (I think they run like $100/month and still have to pay $30 for office visits – ultimately $1200/year not including Rx's, office visits, glasses/contacts, dental visits and whatever else). Ugh.
I love these past two posts. Awesome breakdowns.
I am a sales rep for a smaller family company. So I get the best of both worlds. I live away from the company so i work from home, set my own hours, earn whatever I bring in, and I dont have to worry about all the extra paperwork etc. I am also technically self employed so I can pay for business expenses out of pocket plus insurance and am not stuck with whatever the company decides to use for health ins and office supplies. BUT they still equip me with a computer and a few extras here and there.
As long as I am meeting and exceeding sales projections, I have A LOT of freedom. Yet not all of the responsibility. Love it!
is that 19% flat rate for everyone? I live in Indiana and work for myself (real estate) and have lots of write offs, but it seems like we always end up paying lots on taxes, probably about 30% or more. any suggestions?
Oh the 19% flat rate in Canada is for any small Canadian corporation (that is defined by if you earn under half a million gross a year).
I don’t know what it would be in the States.. but perhaps you aren’t incorporated and that might be making the difference? As a sole proprietor for my other business, I pay a lot of taxes on what I earn depending on how much I earn.